Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. þ

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ¨ No þ

As of November 30, 2011, the last business day of the most recently completed second fiscal quarter, shares held by non-affiliates of the registrant had an aggregate market value of $9,428,956,553
based on the closing price reported for such date on the NASDAQ Global Select Market.

As of June 30, 2012,
362,758,777 shares of the registrants common stock, $.01 par value, were outstanding.

Documents Incorporated
by Reference

Portions of the registrants definitive proxy statement to be issued in connection with its Annual
Meeting of Stockholders to be held on or about October 23, 2012, to the extent not set forth herein, are incorporated by reference into Part III, Items 10 through 14, inclusive.

Certain written and oral statements made by management of Paychex, Inc. and its wholly owned subsidiaries (we,
our, us, Paychex, or the Company) may constitute forward-looking statements within the meaning of the safe harbor provisions of the United States (U.S.) Private Securities
Litigation Reform Act of 1995 (the Reform Act). Forward-looking statements can be identified by such words and phrases as we expect, expected to, estimates, estimated, current
outlook, we look forward to, would equate to, projects, projections, projected to be, anticipates, anticipated, we believe, could be,
and other similar phrases. Examples of forward-looking statements include, among others, statements we make regarding operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating
to revenue growth, earnings, earnings-per-share growth, or similar projections.

Forward-looking statements are neither
historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends,
the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict, many of which are outside our control.
Our actual results and financial conditions may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance upon any of these forward-looking statements. Important factors that could cause
our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:



general market and economic conditions including, among others, changes in U.S. employment and wage levels, changes to new hiring trends, legislative
changes to stimulate the economy, changes in short- and long-term interest rates, changes in the fair value and the credit rating of securities held by us, and accessibility of financing;



changes in demand for our services and products, ability to develop and market new services and products effectively, pricing changes and the impact of
competition;



changes in the availability of skilled workers;



changes in the laws regulating collection and payment of payroll taxes, professional employer organizations, and employee benefits, including
retirement plans, workers compensation, health insurance, state unemployment, and section 125 plans;

changes in technology that adversely affect our products and services and impact our ability to provide timely enhancements to services and products;



the possibility of a security breach that disrupts operations or exposes client confidential data;



the possibility of failure of our operating facilities, computer systems, and communication systems during a catastrophic event;



the possibility of third-party service providers failing to perform their functions;



the possibility of a failure of internal controls or our inability to implement business processing improvements;



the possibility that we may be subject to liability for violations of employment or discrimination laws by our clients and acts or omissions of client
employees who may be deemed to be our agents, even if we do not participate in any such acts or violations; and

Any of these factors, as well as such other factors as discussed in Part I, Item 1A. Risk
Factors and throughout Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K (Form 10-K), as well as in our periodic filings with the Securities and
Exchange Commission (SEC or Commission), could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-K is based upon the facts and circumstances known at this
time, and any forward-looking statement made by us in this Form 10-K speaks only as of the date on which it is made. We undertake no obligation to update these forward-looking statements after the date of filing of this Form 10-K with the SEC
to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.

Item 1.

Business

We are a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. As of
May 31, 2012, we serviced approximately 567,000 clients, including approximately 2,000 clients through four offices in Germany. We maintain our corporate headquarters in Rochester, New York, and have more than 100 offices nationwide.

Our company was formed as a Delaware corporation in 1979. We report our results of operations and financial condition as one
business segment. Our fiscal year ends May 31.

Company Strategy

We are focused on achieving strong, long-term financial performance by:

By offering ancillary services that leverage the information gathered in the base payroll
processing service, we are able to provide comprehensive outsourcing services that allow employers to expand their employee benefits offerings at an affordable cost. We mainly earn our revenue through recurring fees for services performed. Service
revenue is primarily driven by the number of clients, checks or transactions per client per pay period, and utilization of ancillary services.

Payroll

Payroll processing is the foundation of our service portfolio. Our
payroll service includes the calculation, preparation, and delivery of employee payroll checks; production of internal accounting records and management reports; preparation of federal, state, and local payroll tax returns; and collection and
remittance of clients payroll obligations. Our payroll services are provided through either our core payroll or Major Market Services (MMS) and are made available to clients via traditional or Internet-based methods.

Major Market Services: MMS primarily targets companies that have more
sophisticated payroll and benefits needs. We currently offer this service in all of our significant markets. Our proprietary MMS software, Preview®, provides a powerful payroll solution and allows smooth integration with other Paychex service offerings. Preview can be used as an on-site, PC-based system or via a
secure web-hosted environment.

We offer a software-as-a-service (SaaS) solution to meet the payroll and human
resource administrative needs of our MMS clients. This allows Preview to be integrated with various Internet-based services offered to assist clients with their administrative human resource and payroll needs through every step of the employee life
cycle. Ancillary services particularly beneficial to our MMS clients include the following:

Paychex Time and Labor Online makes the time and attendance process more efficient. This solution can reduce time spent on preparing timesheets,
minimize redundant data entry, increase awareness of critical labor information, and aid in compliance with federal time recording requirements.



Paychex Expense Manager is an integrated payroll and expense management solution that allows clients to control discretionary spending while giving
employees an easy-to-use, secure tool to prepare and submit expense reports online.



Applicant tracking, offered through our partnership with Taleo Corporation, provides our MMS clients with a tool to manage their recruiting process in
order to better hire and retain talented employees.

Online payroll
services: Our core payroll clients can opt to use Paychex Online, our secure Internet site, which offers a suite of self-service, interactive services and products twenty-four hours a day, seven days a week. These
include Paychex Online Payroll®, Internet Time Sheet, Paychex Online Reports, and General Ledger Reporting
Service. Using these services, clients can communicate payroll information, access current and historical payroll information, and transfer payroll information calculated by us to their general ledger accounting software, eliminating manual entries
and improving the accuracy of bookkeeping. In addition, we offer self-service and mobile applications for small business through our SurePayroll, Inc. (SurePayroll) SaaS product offering.

MMS clients can select Paychex One-Source Solutions, which seamlessly integrates Preview, Paychex Time and Labor Online, and Paychex HR
Online applications through a single, web-based client portal. MMS clients also have the option to select from a number of á la carte payroll and human resource ancillary services or opt for our comprehensive human resource and payroll
outsourcing solution, Paychex HR Solutions. This flexibility allows our clients to define the solution that best meets their particular needs.

During fiscal 2012, we introduced enhancements to our SaaS offerings
through a single sign-on and landing page and our Paychex Online Mobile applications. Our mobility apps are now available for
iPad® and Android tablets and smartphones, and allow our clients and their employees to have full access to our products, offering diverse capabilities for both the employer and
employee.

Payroll tax administration services: As of May 31,
2012, nearly all of our clients utilized our payroll tax administration services (including Taxpay®), which
provide accurate preparation and timely filing of quarterly and year-end tax returns, as well as the electronic transfer of funds to the applicable tax or regulatory agencies (federal, state, and local). In connection with these services, we
electronically collect payroll taxes from clients bank accounts, typically on payday, prepare and file the applicable tax returns, and remit taxes to the applicable tax or regulatory agencies on the respective due dates. These taxes are
typically paid between one and 30 days after receipt of collections from clients, with some items extending to 90 days. We handle regulatory correspondence, amendments, and penalty and interest disputes, and we are subject to cash
penalties imposed by tax or regulatory agencies for late filings and late or under payment of taxes.

Employee payment services: As of May 31, 2012, 82% of our clients utilized
our employee payment services, which provide the employer the option of paying their employees by direct deposit, payroll debit card, a check drawn on a Paychex account (Readychex®), or a check drawn on the employers account and electronically signed by us. For the first three methods, we electronically collect net payroll from the
clients bank accounts, typically one business day before payday, and provide payment to the employees on payday. Our flexible payment options provide a cost-effective solution that offers the benefit of convenient, one-step payroll account
reconciliation for employers.

Regulatory compliance services: We offer new-hire reporting
services, which enable clients to comply with federal and state requirements to report information on newly hired employees. This information aids the government in enforcing child support orders and minimizes fraudulent unemployment and
workers compensation insurance claims. Our garnishment processing service provides deductions from employees pay, forwards payments to third-party agencies, including those that require electronic payments, and tracks the obligations to
fulfillment. These services enable employers to comply with legal requirements and reduce the risk of penalties.

Human
Resource Services

Paychex HR Solutions: We offer comprehensive human resource
outsourcing solutions that provide businesses a full-service approach to the outsourcing of employer and employee administrative needs. Our Paychex HR Solutions offering is available as an administrative services organization (ASO) and a
professional employer organization (PEO). Both options offer businesses a combined package of services that includes payroll, employer compliance, human resource and employee benefits administration, risk management outsourcing, and the
on-site availability of a professionally trained human resource representative. These comprehensive bundles of services are designed to make it easier for businesses to manage their payroll and related benefit costs while providing a benefits
package equal to that of larger companies. Our PEO differs from the ASO in that we serve as a co-employer of the clients employees, assume the risks and rewards of workers compensation insurance, and provide health care coverage to PEO
client employees. PEO services continue to be sold through our registered and licensed subsidiary, Paychex Business Solutions, Inc. The integration of the sales and service models of the ASO and PEO under Paychex HR Solutions has reduced
redundancies and created more flexible options for business owners to find the solution that best meets their needs. In fiscal 2011, we introduced Paychex HR Essentials, which is an ASO product that provides support to our clients over the phone or
online to help manage employee-related topics. As of May 31, 2012, Paychex HR Solutions were utilized by 23,000 clients with approximately 615,000 client employees.

have the ability to choose from a group of pre-defined fund selections or to customize their investment options within their plan. Selling efforts for these services are focused primarily on our
existing payroll client base, as the processed payroll information allows for data integration necessary to provide these services efficiently. We are one of the largest 401(k) recordkeepers for small businesses in the U.S. For fiscal 2012 and
fiscal 2011, we earned an average fee between twenty and twenty-five basis points from the external fund managers based on the total asset value of client employee 401(k) funds. In May 2011, we acquired ePlan Services, Inc., a provider of
recordkeeping and administrative solutions to the defined contribution marketplace. This acquisition allows us to expand our retirement services to financial advisors. As of May 31, 2012, retirement services were utilized by approximately
59,000 clients and the asset value of client employee 401(k) funds externally managed totaled approximately $15.7 billion.

Insurance services: Our licensed insurance agency, Paychex Insurance Agency, Inc. (PIA),
provides insurance through a variety of carriers. Insurance offerings include property and casualty coverage such as workers compensation; business-owner policies; commercial auto; and health and benefits coverage, including health, dental,
vision, and life. Our insurance services simplify the insurance process to make it easy to find plans with the features and affordability to meet the clients needs. With access to numerous top national and regional carriers, our professional
insurance agents enjoy a wide selection of plans from which to best match the insurance needs of small businesses. Clients also have the option to integrate with Paychex payroll processing for easy, accurate plan administration. PIA has a website,
www.paychexinsurance.com, with information and interactive tools to help educate visitors on insurance and aid in making business insurance decisions. As of May 31, 2012, approximately 107,000 clients have appointed PIA as their agent
for servicing their business insurance needs.

eServices: We offer online human resource
administration software products for employee benefits management and administration and time and attendance solutions. Paychex HR Online offers powerful tools for managing employee benefits, personnel information, and human resource compliance and
reporting. Time and Labor Online helps minimize the time spent compiling time sheet information. It allows the employer to handle multiple payroll scenarios and results in improved productivity, accuracy, and reliability in the payroll process.

Other human resource services and products: We offer the outsourcing of plan
administration under section 125 of the Internal Revenue Code, allowing employees to use pre-tax dollars to pay for certain health insurance benefits and health and dependent care expenses not covered by insurance. All required implementation,
administration, compliance, claims processing and reimbursement, and coverage tests are provided with these services. We offer state unemployment insurance services, which provide clients with prompt processing for all claims, appeals,
determinations, change statements, and requests for separation documents. Other Human Resource Services products include employee handbooks, management manuals, and personnel and required regulatory forms. These products are designed to simplify
clients office processes and enhance their employee benefits programs.

Sales and Marketing

We market our services primarily through our direct sales force based in the metropolitan markets we serve, with sales representatives
specializing within our portfolio of services. Our sales representatives are also supported by marketing, advertising, public relations, trade shows, and telemarketing programs. In recent years, we have increased our emphasis on the selling of
ancillary services and products to both new clients and our existing client base.

In addition to our direct selling and
marketing efforts, we utilize relationships with existing clients, certified public accountants (CPAs), and banks for new client referrals. Approximately 60% of our new core payroll clients (excluding business acquisitions) come from
these referral sources. To further enhance our strong relationship with CPAs, we have partnered with the American Institute of Certified Public Accountants (AICPA) since 2003 and through September 2016 as the preferred payroll provider
for its AICPA Business Solutions Partner Program.

Our website at www.paychex.com, which includes online payroll sales
presentations and service and product information, is a cost-efficient tool that serves as a source of leads and new sales while complementing the efforts of our direct sales force. This online tool allows us to market to clients in other areas. In
addition, our

insurance services website at www.paychexinsurance.com provides information to help small businesses navigate the insurance industry, and generates leads by allowing interested parties to
get in contact with one of our professional insurance agents.

In addition, Advantage Payroll Services Inc.
(Advantage), a wholly owned subsidiary of Paychex, Inc., has license agreements with independently owned associate offices (Associates), which are responsible for selling and marketing Advantage payroll services and
performing certain operational functions, while Paychex and Advantage provide all centralized back-office payroll processing and payroll tax administration services. The marketing and selling by the Associates is conducted under their own logos.

Paychex also builds on its reputation as an expert in the payroll and human resources industry by providing education and
assistance to clients and other interested parties. We provide free webinars, white papers, and other information on our website to aid existing and prospective clients with the impact of regulatory changes. We track current regulatory issues that
impact the small business community and provide a monthly regulatory update. In an effort to help entrepreneurs and small-business owners achieve success, in fiscal 2012 we launched a new website, BuildMyBiz.com, that provides tools and
resources for starting, growing, and managing a business.

Markets and Competition

We remain focused on servicing small- to medium-sized businesses based upon the growth potential that we believe exists in the markets we
serve. Industry data indicates there are approximately ten million employers in the geographic markets that we currently serve within the U.S. Of those employers, greater than 99% have fewer than 100 employees and are our primary
customers and target market.

We serve a diverse base of small- to medium-sized clients operating in a broad range of
industries located throughout the U.S. and in Germany. As of May 31, 2012, we serviced approximately 567,000 payroll clients. We utilize service agreements and arrangements with clients that are generally terminable by the client at any time or
upon relatively short notice. For fiscal 2012, client retention was approximately 80% of our beginning client base, up from 79% for fiscal 2011. No single client has a material impact on total service revenue or results of operations.

The composition of the U.S. market and the client base we serve by number of employees is as follows:

Business size(Number of employees)

Estimated

market
distribution(1)

Paychex, Inc. distribution

of client base

1-4

83%

42%

5-19

13%

40%

20-49

2%

12%

50-99

1%

4%

100+

1%

2%

(1)

Based on currently available market data from Dun & Bradstreet.

The market for payroll processing and human resource services is highly competitive and fragmented. Our primary
national competitor, ADP® (Automatic Data Processing, Inc.), is the largest U.S. third-party
provider of payroll processing and human resource services in terms of revenue. We compete with other national, regional, local, and online service providers, all of which we believe have significantly smaller client bases than us.

In addition to traditional payroll processing and human resource service providers, we compete with in-house payroll and human resource
systems and departments. Payroll and human resource systems and software are sold by many vendors. Our Human Resource Services also compete with a variety of providers of human resource services, such as retirement services companies, insurance
companies, and human resources and benefits consulting firms.

Competition in the payroll processing and human resource
services industry is primarily based on service responsiveness, product quality and reputation, breadth of service and product offering, and price. We believe we are competitive in each of these areas.

The ever-changing mandates of federal, state, and local tax and regulatory agencies require us to regularly update the proprietary
software we utilize to provide payroll and human resource services to our clients. We are continually engaged in developing enhancements to and the maintenance of our various software platforms to meet the changing requirements of our clients and
the marketplace.

In fiscal 2010, we completed implementation of an enhanced platform for our core payroll processing
capability, which allows us to leverage efficiencies in our processes and continue to provide excellent customer service. Our Paychex Next Generation platform, with its suite of innovative products, is expanding these enhancements to our additional
service offerings over the next few years.

Employees

As of May 31, 2012, we employed approximately 12,400 people. None of our employees were covered by collective bargaining agreements.

Intellectual Property

We own or license and use a number of trademarks,
trade names, copyrights, service marks, trade secrets, computer programs and software, and other intellectual property rights. Taken as a whole, our intellectual property rights are material to the conduct of our business. Where it is determined to
be appropriate, we take measures to protect our intellectual property rights, including, but not limited to, confidentiality/non-disclosure agreements or policies with employees, vendors, and others; license agreements with licensees and licensors
of intellectual property; and registration of certain trademarks. We believe that the Paychex name, trademark, and logo are of material importance to us.

Seasonality

There is no significant seasonality to our business. However,
during our third fiscal quarter, which ends in February, the number of new payroll clients, new retirement services clients, and new Paychex HR Solutions worksite employees tends to be higher than during the rest of the fiscal year, primarily
because a majority of new clients begin using our services at the beginning of a calendar year. In addition, calendar year-end transaction processing and client funds activity are traditionally higher during our third fiscal quarter due to clients
paying year-end bonuses and requesting additional year-end services. Historically, as a result of these factors, our total revenue has been slightly higher in our third fiscal quarter, with greater sales commission expenses also reported in the
third quarter.

Other

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act). Therefore, we file periodic reports, proxy statements, and other
information with the SEC. Such reports may be read and copied at the SECs Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at
(800) SEC-0330. The SEC also maintains a website (www.sec.gov) that includes our reports, proxy statements, and other information.

Information about our services and products, stockholder information, press releases, and filings with the SEC can be found on our website at www.paychex.com. Our Form 10-Ks, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and other SEC filings, as well as any amendments to such reports and filings, are made available, free of charge, under the Corporate tab, in the Investor Relations section of our website as soon
as reasonably practical after such material is filed with, or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act to the SEC. Also, copies of our Annual Report to Stockholders and Proxy Statement, to be issued in connection with
our 2012 Annual Meeting of Stockholders, will be made available, free of charge, upon written request submitted to Paychex, Inc., c/o Corporate Secretary, 911 Panorama Trail South, Rochester, New York 14625-2396.

Our future results of operations are subject to a number of risks and uncertainties. These risks and uncertainties could cause actual
results to differ materially from historical and current results, and from our projections. Risk factors described below represent our current view of some of the most important risks facing our business and are important to understanding our
business. The risks described below are not the only risks we face. Additional factors not presently known to us or that we currently deem to be immaterial also may adversely affect, to a material extent, our business, cash flows, financial
condition, or results of operations in future periods. In addition, you should refer to the description of forward-looking statements at the beginning of Part I of this Form 10-K.

Our services may be adversely impacted by changes in government regulations and policies: Many of our
services, particularly payroll tax administration services and employee benefit plan administration services, are designed according to government regulations that continually change. Changes in regulations could affect the extent and type of
benefits employers are required, or may choose, to provide employees or the amount and type of taxes employers and employees are required to pay. Such changes could reduce or eliminate the need for some of our services and substantially decrease our
revenue. Added requirements could also increase our cost of doing business. Failure to educate and assist our clients regarding new or revised legislation that impacts them could have an adverse impact on our reputation. Failure by us to modify our
services in a timely fashion in response to regulatory changes could have a material adverse effect on our business and results of operations.

Our clients and our business could be adversely impacted by Health Care Reform: The Patient Protection and Affordable Care Act (the PPACA) was enacted on
March 23, 2010. The PPACA was subsequently modified by the Heath Care and Education Reconciliation Act of 2010 on March 30, 2010 (together with PPACA hereafter referred to as the Act). The Act entails sweeping health care
reforms with staggered effective dates from 2010 through 2018, and many provisions of the Act require the issuance of additional guidance from the U.S. Departments of Labor and Heath & Human Services, the Internal Revenue Service (the
IRS), and the states.

The complexity of federal and state regulations facing employers has continued to increase
over time, including the enactment of the Act. As a service provider, we have a responsibility to our clients to help them understand and adapt to these increased regulations. However, we are currently unable to determine the impacts to our clients
and our business of the required plan changes and provisions resulting from the Act.

Also, as a co-employer in our PEO, we
assume or share many of the employer-related responsibilities and assist our clients in complying with many employment-related governmental regulations. Within this business, the changes may result in increased costs, limit or delay our ability to
increase service fees to offset such increased costs, and could affect our ability to attract and retain clients.

Our
interest earned on funds held for clients may be impacted by changes in government regulations mandating the amount of tax withheld or timing of remittance: We receive interest income from investing client funds
collected but not yet remitted to applicable tax or regulatory agencies or to client employees. A change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to applicable tax or regulatory
agencies would adversely impact this interest income.

We may not be able to keep pace with changes in technology or
provide timely enhancements to our products and services: To maintain our growth strategy, we must adapt and respond to technological advances and technological requirements of our clients. Our future success will
depend on our ability to enhance capabilities and increase the performance of our internal use systems, particularly our systems that meet our clients requirements. We continue to make significant investments related to the development of new
technology. If our systems become outdated, we may be at a disadvantage when competing in our industry. There can be no assurance that our efforts to update and integrate systems will be successful. If we do not integrate and update our systems in a
timely manner, or if our investments in technology fail to provide the expected results, there could be a material adverse effect to our business and results of operations.

Our business and reputation may be affected by security breaches and other disruptions
to our information technology infrastructure, which could compromise Company and customer information: We rely upon information technology networks and systems to process, transmit, and store electronic information,
and to support a variety of business processes. Vulnerabilities, threats, and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks, and the confidentiality, availability, and integrity of our data.
While we attempt to mitigate these risks by employing a number of security measures and constantly updating and adapting security requirements, our networks, products, and services remain potentially vulnerable to advanced persistent threats.

If we experience a problem with the functioning of key systems or a security breach of our systems, the resulting disruptions
could have a material adverse effect on our business. Our business involves the use of significant amounts of private and confidential client information including employees identification numbers, bank accounts, and retirement account
information. This information is critical to the accurate and timely provision of services to our clients, and certain information may be transmitted via the Internet. This information could be compromised by a cyber attack. There is no guarantee
that our systems and processes are adequate to protect against all security breaches. If our systems are disrupted or fail for any reason, or if our systems are infiltrated by unauthorized persons, both the Company and our clients could experience
data loss, financial loss, harm to reputation, or significant business interruption. We may be required to incur significant costs to protect against damage caused by disruptions or security breaches in the future. Such events may expose us to
unexpected liability, litigation, regulation investigation and penalties, loss of clients business, unfavorable impact to business reputation, and there could be a material adverse effect on our business and results of operations.

We may be adversely impacted by any failure of third-party service providers to perform their
functions: As part of providing services to clients, we rely on a number of third-party service providers. These service providers include, but are not limited to, couriers used to deliver client payroll checks and
banks used to electronically transfer funds from clients to their employees. Failure by these service providers, for any reason, to deliver their services in a timely manner could result in material interruptions to our operations, impact client
relations, and result in significant penalties or liabilities to us.

We may be exposed to additional risks related to
our co-employment relationship within our PEO business: Many federal and state laws that apply to the employer-employee relationship do not specifically address the obligations and responsibilities of the
co-employment relationship. As a result, there is a possibility that we may be subject to liability for violations of employment or discrimination laws by our clients and acts or omissions of client employees, who may be deemed to be our
agents, even if we do not participate in any such acts or violations. Although our agreements with the clients provide that the client will indemnify us for any liability attributable to its own or its employees conduct, we may not be able to
effectively enforce or collect such contractual obligations. In addition, we could be subject to liabilities with respect to our employee benefit plans if it were determined that we are not the employer under any applicable state or
federal laws.

We may be adversely impacted by changes in health insurance and workers compensation rates and
underlying claims trends: Within our PEO business, we maintain health and workers compensation insurance covering worksite employees. The insurance costs are impacted by claims experience and are a significant
portion of our PEO direct costs. If we experience a sudden and unexpected increase in claims activity, our costs could increase. In addition, in the event of expiration or cancellation of existing contracts, we may not be able to secure replacement
contracts on competitive terms. Increases in costs not incorporated into service fees timely or fully, could have a material adverse effect. Incorporating cost increases into service fees could also impact our ability to attract and retain clients.

We may be adversely impacted by volatility in the financial and economic
environment: During periods of weak economic conditions, employment levels tend to decrease and interest rates may become more volatile. These conditions may impact our business due to lower transaction volumes or an
increase in the number of clients going out of business. Current or potential clients may decide to reduce their spending on payroll and other outsourcing services. In addition, new business formation may be affected by an inability to obtain
credit. The interest we earn on funds held for clients may decrease as a result of a decline in funds available to invest and lower interest rates. In addition, during periods of volatility in the credit markets, certain types of

investments may not be available to us or may become too risky for us to invest in, further reducing the interest we may earn on client funds. Constriction in the credit markets may impact the
availability of financing, even to borrowers with the highest credit ratings. We historically have not borrowed against available credit arrangements to meet liquidity needs. However, should we require additional short-term liquidity during days of
large outflows of client funds, a credit constriction may limit our ability to access those funds or the flexibility to obtain them at interest rates that would be acceptable to us. If all of these financial and economic circumstances were to remain
in effect for an extended period of time, there could be a material adverse effect on our results of operations.

In the
event of a catastrophe, our business continuity plan may fail, which could result in the loss of client data and adversely interrupt operations: Our operations are dependent on our ability to protect our infrastructure
against damage from catastrophe or natural disaster, severe weather including events resulting from climate change, unauthorized security breach, power loss, telecommunications failure, terrorist attack, or other events that could have a significant
disruptive effect on our operations. We have a business continuity plan in place in the event of system failure due to any of these events. Our business continuity plan has been tested in the past by circumstances of severe weather, including floods
and snowstorms, and has been successful. However, these past successes are not an indicator of success in the future. If the business continuity plan is unsuccessful in a disaster recovery scenario, we could potentially lose client data or
experience material adverse interruptions to our operations or delivery of services to our clients.

Quantitative and
qualitative disclosures about market risk: Refer to Item 7A of this Form 10-K for a discussion on Market Risk Factors.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

We owned and leased the following properties as of May 31, 2012:

Square feet

Owned facilities:

Rochester, New York

721,000

Other U.S. locations

280,000

Total owned facilities

1,001,000

Leased facilities:

Rochester, New York

133,000

Other U.S. locations

2,104,000

Germany

1,000

Total leased facilities

2,238,000

Our facilities in Rochester, New York house various distribution, processing, and technology functions;
certain ancillary functions; a telemarketing unit; and other back-office functions. Facilities outside of Rochester, New York are at various locations throughout the U.S. and Germany and house our regional, branch, and sales offices and data
processing centers. These locations are concentrated in metropolitan areas. We believe that adequate, suitable lease space will continue to be available to meet our needs.

Item 3.

Legal Proceedings

We are subject to various claims and legal matters that arise in the normal course of our business. These include disputes or potential disputes related to breach of contract, breach of fiduciary duty,
employment-related claims, tax claims, and other matters.

Our management currently believes that resolution of outstanding legal matters will not have
a material adverse effect on our financial position or results of operations. However, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse
impact on the Companys financial position and the results of operations in the period in which any such effect is recorded.

Our common stock trades on the NASDAQ Global Select Market under the symbol PAYX. Dividends have historically been paid on our
common stock in August, November, February, and May. The level and continuation of future dividends are dependent on our future earnings and cash flows, and are subject to the discretion of the Board of Directors.

As of June 30, 2012, there were 14,986 holders of record of our common stock, which includes registered holders and participants in
the Paychex, Inc. Dividend Reinvestment and Stock Purchase Plan. There were also 7,368 participants in the Paychex, Inc. Employee Stock Purchase Plan and 5,674 participants in the Paychex, Inc. Employee Stock Ownership Plan.

The high and low sale prices for our common stock as reported on the NASDAQ Global Select Market and dividends for fiscal 2012 and fiscal
2011 are as follows:

Fiscal 2012

Fiscal 2011

Sales prices

Cashdividendsdeclared
pershare

Sales prices

Cashdividendsdeclared
pershare

High

Low

High

Low

First quarter

$

32.27

$

25.12

$0.31

$

29.14

$

24.65

$0.31

Second quarter

$

30.12

$

25.20

$0.32

$

28.88

$

25.16

$0.31

Third quarter

$

32.73

$

28.76

$0.32

$

33.69

$

28.78

$0.31

Fourth quarter

$

32.24

$

29.12

$0.32

$

33.91

$

30.75

$0.31

The closing price of our common stock as of May 31, 2012, as reported on the NASDAQ Global Select
Market, was $29.97 per share.

The following graph shows a five-year comparison of the total cumulative returns of investing
$100 on May 31, 2007, in Paychex common stock, the S&P 500 Index, the S&P Data Processing and Outsourced Services (the S&P S(DP)), and a Peer Group Index. All comparisons of stock price performance shown assume
reinvestment of dividends. We are a participant in the S&P 500 Index, a market group of companies with a larger than average market capitalization. The S&P S(DP) Index is an industry index that includes a representative peer group of
companies, and includes Paychex. This index is shown for transition purposes, as in fiscal 2012 we began to compare our total return to our Peer Group. Our Peer Group is a group of companies with comparable revenue and net income, who are in a
comparable industry or who are direct competitors of Paychex (as detailed on the page following). This change was made to compare to an index with a more extensive group of companies within a comparable industry, and to be consistent with the
companies we reference for evaluating our executive officer compensation program.

There can be no assurance that our stock performance will continue into the future with the same or
similar trends depicted in the graph above. We will neither make nor endorse any predictions as to future stock performance.

Includes an expense charge of $18.7 million to increase the Rapid Payroll litigation reserve.

Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

Managements Discussion and Analysis of Financial Condition and Results of Operations reviews the operating results of Paychex, Inc.
and its wholly owned subsidiaries (Paychex, we, our, or us) for each of the three fiscal years ended May 31, 2012 (fiscal 2012), May 31, 2011 (fiscal 2011), and
May 31, 2010 (fiscal 2010), and our financial condition as of May 31, 2012. This review should be read in conjunction with the accompanying consolidated financial statements and the related notes to consolidated financial
statements contained in Item 8 of this Annual Report on Form 10-K (Form 10-K) and the Risk Factors discussed in Item 1A of this Form 10-K. Forward-looking statements in this review are qualified by
the cautionary statement under the heading Cautionary Note Regarding Forward-Looking Statements Pursuant to the United States Private Securities Litigation Reform Act of 1995 contained at the beginning of Part I of this
Form 10-K.

Overview

We are a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses. Our Payroll and Human Resource Services offer a portfolio of services and
products that allow our clients to meet their diverse payroll and human resource needs. Our payroll services are the foundation of our service portfolio. They are provided through either our core payroll or Major Market Services (MMS),
which is utilized by clients that have more sophisticated payroll and benefits needs, and include:

Paychex HR Solutions, under which we offer our administrative services organization (ASO) and our professional employer organization
(PEO). We also offer Paychex HR Essentials, an ASO product that provides support to our clients over the phone or online to help manage employee-related topics;



retirement services administration;



insurance services;



eServices; and



other human resource services and products.

Our business strategy is focused on achieving strong long-term financial performance by providing high-quality, timely, accurate, and affordable services; growing our client base; increasing utilization
of our ancillary services; leveraging our technology and operating infrastructure; and expanding our service offerings. We continue to focus on driving growth in clients, revenue, and profits. We are managing our personnel costs and expenses while
continuing to invest in our business, particularly in areas related to innovation and supporting technology. We believe these investments are critical to our success. Looking to the future, we continue to focus on investing in our products, people,
and service capabilities, positioning ourselves to capitalize on opportunities for long-term growth.

Our financial results for
fiscal 2012 reflected sustained growth in our business. Our key business indicators of checks per payroll and revenue per check continued to show improvement. Checks per payroll grew 2.0% for fiscal 2012. This growth is slightly less than the growth
of 2.7% for fiscal 2011, as expected. Our revenue growth has been moderate, as new business formation remains challenged.

Our
financial results continue to be adversely impacted by the interest rate environment. The equity markets hit a low in March 2009, with interest rates available on high quality financial instruments remaining low since that time. The Federal Funds
rate has been at a range of zero to 0.25% since December 2008. Our combined funds held for clients and corporate investment portfolios earned an average rate of return of 1.1% for fiscal 2012, compared to 1.3% for fiscal 2011 and 1.5% for fiscal
2010.

Highlights of our financial results for fiscal 2012 compared to fiscal 2011 are as follows:



Payroll service revenue increased 5% to $1.5 billion.



Human Resource Services revenue increased 13% to $676.2 million.



Interest on funds held for clients decreased 9% to $43.6 million.



Total revenue increased 7% to $2.2 billion.



Operating income increased 9% to $853.9 million, and operating income, net of certain items, increased 10% to $810.3 million. Refer to the
Non-GAAP Financial Measure discussion on the following page for further information on operating income, net of certain items.



Net income and diluted earnings per share each increased 6% to $548.0 million and $1.51 per share, respectively.



Dividends of $460.5 million were paid to stockholders, representing 84% of net income.

Our results for fiscal 2012 benefited from the inclusion of SurePayroll, Inc. (SurePayroll), a provider of payroll processing
for small businesses, acquired on February 8, 2011, and ePlan Services, Inc. (ePlan), a provider of recordkeeping and administrative solutions to the defined contribution marketplace, acquired on May 3, 2011. These acquisitions
in fiscal 2011 and an immaterial business acquisition in fiscal 2012 contributed approximately 2% in total revenue growth for fiscal 2012.

In addition to reporting operating income, a United States (U.S.) generally accepted accounting principle (GAAP) measure, we present operating income, net of certain items, which
is a non-GAAP measure. We believe operating income, net of certain items, is an appropriate additional measure, as it is an indicator of our core business operations performance period over period. It is also the basis of the measure used internally
for establishing the following years targets and measuring managements performance in connection with certain performance-based compensation payments and awards. Operating income, net of certain items, excludes interest on funds held for
clients and the expense charge in fiscal 2010 to increase the litigation reserve. Interest on funds held for clients is an adjustment to operating income due to the volatility of interest rates, which are not within the control of management. The
expense charge to increase the litigation reserve is also an adjustment to operating income due to its unusual and infrequent nature. It is outside the normal course of our operations and obscures the comparability of performance period over period.
Operating income, net of certain items, is not calculated through the application of GAAP and is not the required form of disclosure by the Securities and Exchange Commission. As such, it should not be considered as a substitute for the GAAP measure
of operating income and, therefore, should not be used in isolation, but in conjunction with the GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined
non-GAAP measure used by other companies.

Business Outlook

Our client base totaled approximately 567,000 clients as of May 31, 2012, compared to approximately 564,000 clients as of May 31, 2011, and approximately 536,000 clients as of May 31, 2010.
Our client base increased 0.5% for fiscal 2012, compared to an increase of 5.2% for fiscal 2011 and a decline of 3.2% for fiscal 2010. Our organic client base growth was essentially flat for fiscal 2012 and declined 0.9% for fiscal 2011.

For fiscal 2012, payroll services client retention was approximately 80% of our beginning client base, a return to historical levels. This
is a slight increase over fiscal 2011. Through our focus on providing high-quality service to our customers to maximize client retention, we received the highest client satisfaction results in our history.

Continued investment in our business is critical to our success. We continued to expand our product portfolio, through internal
development and acquisitions, to add value for our clients. In the second half of fiscal 2011, we acquired SurePayroll and ePlan. These acquisitions have created excellent opportunities in their markets, and allow Paychex to offer a full range of
payroll and 401(k) outsourcing alternatives. During fiscal 2012, we continued to integrate these acquired companies. In December 2011, we purchased Icon Time Systems, Inc., a provider of time and attendance solutions for small and medium-sized
businesses, with whom we previously had a successful business relationship through one of our time and attendance offerings. Additionally,

we launched new ancillary products in fiscal 2012. Our Business Insurance Payment Service relieves business owners of the administrative burden of paying their insurance premiums. Paychex
Advisory Select 401(k) is a new offering specifically designed for fee-based financial advisors.

We continued to invest in our Paychex Next Generation platform and its suite of innovative products, as we believe this is a key building block to our future success. This new platform allows us to
leverage efficiencies in our processes and to continue to provide excellent customer service to our clients. Our enhanced platform has led to improved productivity within our operations, contributing to the increase in our operating income, net of
certain items, as a percentage of service revenue to 37.1% for fiscal 2012, compared to 36.3% for fiscal 2011.

We continued
the expansion of our insurance services nationwide, simplifying the process required to obtain coverage through our network of national and regional insurers. We now service approximately 107,000 clients through our subsidiary, Paychex Insurance
Agency, Inc. We believe insurance services is an area that continues to offer significant opportunities for future growth.

We
have strengthened our position as an expert in our industry by serving as a source of education and information to clients and other interested parties. We provide free webinars, white papers, and other information on our website to aid existing and
prospective clients with the impact of regulatory changes. In an effort to help entrepreneurs and small-business owners achieve success, we launched a new website, BuildMyBiz.com, that provides tools and resources for starting, growing, and
managing a business. In addition, the Paychex Insurance Agency, Inc. website, www.paychexinsurance.com, helps small business owners navigate the area of insurance coverage.

Financial position and liquidity

The supply of high credit quality
securities has been limited with the continued volatility in the global financial markets, thereby limiting our investment choices. Despite this macroeconomic environment, our financial position as of May 31, 2012 remained strong with cash and
total corporate investments of $790.0 million and no debt.

A substantial portion of our portfolios is invested
in high credit quality securities with AAA and AA ratings and A-1/P-1 ratings on short-term securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair value is less
sensitive to interest rate changes. We believe that our investments as of May 31, 2012 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment.

Our primary source of cash is our ongoing operations. Cash flow from operations was $706.6 million for fiscal 2012.
Historically, we have funded our operations, capital purchases, business acquisitions, and dividend payments from our operating activities. Our positive cash flows in fiscal 2012 allowed us to support our business growth and to pay substantial
dividends to our stockholders. During fiscal 2012, dividends paid to stockholders were 84% of net income. It is anticipated that cash and total corporate investments as of May 31, 2012, along with projected operating cash flows, will support
our normal business operations, capital purchases, and dividend payments for the foreseeable future.

For further analysis of our results of operations for fiscal years 2012, 2011, and 2010, and
our financial position as of May 31, 2012, refer to the tables and analysis in the Results of Operations and Liquidity and Capital Resources sections of this Item 7 and the discussion in the Critical
Accounting Policies section of this Item 7.

Outlook

Our outlook for the fiscal year ending May 31, 2013 (fiscal 2013) is based upon current economic and interest rate
conditions continuing with no significant changes. Our expected fiscal 2013 payroll revenue growth rate is based upon anticipated client base growth, offset by an expected lower rate of growth in checks per payroll, and modest increases in revenue
per check. Human Resource Services revenue growth is expected to remain in line with our historical organic experience. Prior acquisitions are expected to have minimal impact to projected revenue growth rates for fiscal 2013.

Our fiscal 2013 guidance is as follows:

Low

High

Payroll service revenue

3

%



4

%

Human Resource Services revenue

9

%



11

%

Total service revenue

5

%



6

%

Interest on funds held for clients

(8

%)



(6

%)

Investment income, net

25

%



35

%

Net income

5

%



7

%

Operating income, net of certain items, as a percent of service revenue, is expected to approximate 37%
for fiscal 2013. The effective income tax rate for fiscal 2013 is expected to approximate 36%.

Interest on funds held for
clients and investment income for fiscal 2013 are expected to continue to be impacted by the low interest rate environment. The average rate of return on our combined funds held for clients and corporate investment portfolios is expected to remain
at 1.1% for fiscal 2013. As of May 31, 2012, the long-term investment portfolio had an average yield-to-maturity of 2.2% and an average duration of 3.0 years. In the next twelve months, approximately 15% to 20% of this portfolio will mature,
and it is currently anticipated that these proceeds will be reinvested at a lower average interest rate of approximately 1.1%. Investment income is expected to benefit from ongoing investment of cash generated from operations.

Earnings per share for fiscal 2013 is expected to be adversely impacted by approximately $0.01 per share due to a planned increase in our
sales force and an increase in employee-related costs for the increase in the 401(k) employer match implemented during fiscal 2012.

Purchases of property and equipment for fiscal 2013 are expected to be in the range of $95 million to $100 million. This includes costs for internally developed software as we continue to invest in our
product development. Fiscal 2013 depreciation expense is projected to be in the range of $80 million to $85 million, and we project amortization of intangible assets for fiscal 2013 to be slightly less than $20 million.

We invest in highly liquid, investment-grade fixed income securities and do not utilize derivative
instruments to manage interest rate risk. As of May 31, 2012, we had no exposure to high-risk or illiquid investments and had insignificant exposure to European investments. Details regarding our combined funds held for clients and corporate
investment portfolios are as follows:

The net unrealized gain on our investment portfolios was approximately $58.0 million as of July 13, 2012.

(2)

The Federal Funds rate was a range of zero to 0.25% as of May 31, 2012, 2011, and 2010.

(3)

These items exclude the impact of VRDNs, as they are tied to short-term interest rates.

Payroll service revenue: Payroll service revenue increased 5% for fiscal 2012 and 2% for fiscal 2011
to $1.5 billion and $1.4 billion, respectively. Organic growth in payroll service revenue was approximately 4% for fiscal 2012 and 2% for fiscal 2011. Both fiscal 2012 and fiscal 2011 revenue benefited from increases in checks per payroll and
revenue per check. Checks per payroll increased 2.0% for fiscal 2012 compared to fiscal 2011, and fiscal 2011 increased 2.7% compared to fiscal 2010. Revenue per check was positively impacted by price increases, partially offset by discounting. Our
organic client base growth was essentially flat for fiscal 2012, and declined 0.9% for fiscal 2011, as new business formation remains challenged. Client retention improved for both fiscal 2012 and fiscal 2011.

Human Resource Services revenue: Human Resource Services revenue increased 13% for fiscal 2012 and
10% for fiscal 2011 to $676.2 million and $597.4 million, respectively. These growth rates were impacted by the acquisition of ePlan in May 2011 and the sale of Stromberg time and attendance operations (Stromberg), an
immaterial component of Paychex, in October 2009. Organic growth in Human Resource Services revenue, excluding the impacts of these events, was approximately 11% for both fiscal 2012 and fiscal 2011, reflecting growth in clients and price increases.
The following factors contributed to the growth for fiscal 2012 and fiscal 2011:



Paychex HR Solutions revenue was positively impacted by favorable trends in checks per payroll, price increases, and growth in both clients and client
employees. The rate of growth for Paychex HR Solutions revenue for fiscal 2012 was adversely impacted by fewer client employees within our PEO and lower average revenue per employee in our Paychex HR Essentials product.



Insurance services revenue benefited from the continuing growth in health and benefits services revenue and increases in both clients and premiums for
workers compensation insurance services. Health and benefits services revenue increased 24% to $52.3 million for fiscal 2012 and 29% to $42.0 million for fiscal 2011, primarily driven by the increases for the respective periods in the number
of applicants.



Products that primarily support our MMS clients through our SaaS solution continue to experience growth in clients and revenue.



Retirement services revenue benefited from an increase in the average asset value of retirement services client employees funds (excluding ePlan)
for both fiscal 2012 and fiscal 2011. This was partially offset by the impact from a shift in the mix of assets within these funds to investments earning lower fees from external managers.

Includes ePlan as of May 31, 2012 and 2011. Organic growth in retirement services clients would have been approximately 3% for fiscal 2012 and 5% for fiscal 2011.
Organic growth in the asset value of retirement services client employees funds would have been approximately 2% for fiscal 2012 and 26% for fiscal 2011.

Total service revenue: Total service revenue increased 7% for fiscal 2012 and 5% for fiscal 2011, attributable to the factors previously discussed. Organic service
revenue growth was approximately 6% for fiscal 2012 and 4% for fiscal 2011.

Interest on funds held for
clients: Interest on funds held for clients decreased 9% for fiscal 2012 and 13% for fiscal 2011 compared to the respective prior year periods. These declines were the result of lower average interest rates earned,
partially offset by an increase in average investment balances.

Average investment balances for funds held for clients
increased 7% for fiscal 2012 and 6% for fiscal 2011. The increase for fiscal 2012 was the result of the inclusion of SurePayroll client funds, wage inflation, increase in state unemployment insurance rates, and the increase in checks per payroll.
The increase in average investment balances for fiscal 2011 was the result of increases in state unemployment insurance rates and the increase in checks per payroll, offset somewhat by the lingering effects of the difficult economic conditions on
our client base.

Refer to the Market Risk Factors section, contained in Item 7A of this Form 10-K, for
more information on changing interest rates.

Combined operating and SG&A
expenses: The following table summarizes total combined operating and selling, general and administrative (SG&A) expenses for fiscal years:

In millions

2012

Change

2011

Change

2010

Compensation-related expenses

$

920.8

5

%

$

877.7

3

%

$

854.9

Facilities expenses

58.1

(3

%)

60.0

(1

%)

60.4

Depreciation and amortization

97.8

10

%

88.7

3

%

86.5

Other expenses

299.2

10

%

271.5

6

%

255.5

1,375.9

6

%

1,297.9

3

%

1,257.3

Expense charge to increase the Rapid Payroll litigation reserve







(100

%)

18.7

Total operating and SG&A expenses

$

1,375.9

6

%

$

1,297.9

2

%

$

1,276.0

A significant portion of the increases in expenses for fiscal 2012 and fiscal 2011 were driven by the
acquisitions during these periods. Organic growth in combined operating and SG&A expenses (exclusive of acquisitions and the aforementioned $18.7 million expense charge in fiscal 2010) was approximately 3% for fiscal 2012 and 2% for fiscal 2011.
Increases in product innovation and the supporting technology contributed to the increases in total expenses. Expenses related to information technology increased at a faster pace than total expenses for both fiscal 2012 and fiscal 2011.
Improvements in operations productivity with related lower headcount have moderated these increases.

Compensation-related costs for fiscal 2012 were impacted by increased headcount in areas
supporting our development of technology, and higher employee-related costs for health care and 401(k) employer match. In addition, the increase in expenses for fiscal 2011 was primarily driven by personnel-related costs, in part due to
reinstatement of salary increases and 401(k) employer match during fiscal 2011, along with one-time costs related to the separation agreement entered into with Jonathan J. Judge, our former President and Chief Executive Officer. As of May 31,
2012 and 2011, we had approximately 12,400 employees compared with approximately 12,200 employees as of May 31, 2010.

Depreciation expense is primarily related to buildings, furniture and fixtures, data processing equipment, and software. Increases in
depreciation expense were due to capital expenditures as we invested in technology and continued to grow our business. Amortization of intangible assets is primarily related to client list acquisitions, which are amortized using either straight-line
or accelerated methods. Depreciation and amortization increased in fiscal 2012 and fiscal 2011 due to business acquisitions.

Other expenses include items such as delivery, forms and supplies, communications, travel and entertainment, equipment costs, professional
services, and other costs incurred to support our business. The increase in other expenses for fiscal 2012 and fiscal 2011 was primarily attributable to the inclusion of our acquisitions. In addition, higher equipment costs within information
technology and higher professional services supporting our technology development contributed to the increases in other expenses for fiscal 2012.

During fiscal 2010, we recorded an expense charge of $18.7 million to increase our Rapid Payroll litigation reserve. Refer to Note M of the Notes to Consolidated Financial Statements, contained
in Item 8 of this Form 10-K, for additional information on legal matters.

Operating
income: Operating income increased 9% for fiscal 2012 and 8% for fiscal 2011. The fluctuations in operating income were attributable to the factors previously discussed.

Operating income, net of certain items, is as follows for fiscal years:

In millions

2012

Change

2011

Change

2010

Operating income

$

853.9

9

%

$

786.4

8

%

$

724.8

Excluding:

Interest on funds held for clients

(43.6

)

(9

%)

(48.1

)

(13

%)

(55.0

)

Expense charge to increase the Rapid Payroll litigation reserve







(100

%)

18.7

Operating income, net of certain items

$

810.3

10

%

$

738.3

7

%

$

688.5

Operating income, net of certain items, as a percent of service revenue

37.1

%

36.3

%

35.4

%

Refer to the previous discussion of operating income, net of certain items, in the Non-GAAP
Financial Measure section on page 15.

Investment income, net: Investment income,
net, primarily represents earnings from our cash and cash equivalents and investments in available-for-sale securities. Investment income does not include interest on funds held for clients, which is included in total revenue. The increases in
investment income were primarily the result of higher average invested balances. Average investment balances increased 4% for fiscal 2012 and 1% for fiscal 2011. The increases were the result of investment of cash generated from operations,
partially offset by the impact on balances of cash utilized to fund the acquisitions of SurePayroll and ePlan during the second half of fiscal 2011. Fiscal 2011 benefited from a slight increase in average interest rates earned on corporate
investments that was primarily driven by higher yields on funds invested into our longer-term investment portfolio compared to the prior year.

Income taxes: Our effective income tax rate was 36.3% for fiscal 2012 compared to 35.0% for fiscal 2011 and 34.6% for fiscal 2010. The increase in our effective tax
rate for fiscal 2012 was primarily the result of changes in state apportionment and lower levels of tax-exempt income derived from municipal debt securities in the funds held for clients and corporate investment portfolios. The increase in our
effective tax rate for fiscal

2011 was primarily attributable to lower tax-exempt income on available-for-sale securities during fiscal 2011 compared to fiscal 2010. Refer to Note I of the Notes to Consolidated Financial
Statements, contained in Item 8 of this Form 10-K, for additional disclosures on income taxes.

Net income and
earnings per share: Net income increased 6% to $548.0 million for fiscal 2012 and 8% to $515.3 million for fiscal 2011. Diluted earnings per share increased 6% to $1.51 per share for fiscal 2012 and 8% to 1.42 per
share for fiscal 2011. These fluctuations were attributable to the factors previously discussed.

Liquidity and Capital Resources

The supply of high credit quality securities has been limited with the continued volatility in the global financial
markets, thereby limiting our investment choices. Despite this macroeconomic environment, our financial position as of May 31, 2012 remained strong with cash and total corporate investments of $790.0 million and no debt. We also believe that
our investments as of May 31, 2012 were not other-than-temporarily impaired, nor has any event occurred subsequent to that date that would indicate any other-than-temporary impairment. We anticipate that cash and total corporate investments as
of May 31, 2012, along with projected operating cash flows, will support our normal business operations, capital purchases, and dividend payments for the foreseeable future.

Commitments and Contractual Obligations

Lines of
credit: As of May 31, 2012, we had unused borrowing capacity available under four uncommitted, secured, short-term lines of credit at market rates of interest with financial institutions as follows:

Financial institution

Amount available

Expiration date

JP Morgan Chase Bank, N.A.

$

350 million

February 2013

Bank of America, N.A.

$

250 million

February 2013

PNC Bank, National Association

$

150 million

February 2013

Wells Fargo Bank, National Association

$

150 million

February 2013

Our credit facilities are evidenced by promissory notes and are secured by separate pledge security
agreements by and between Paychex, Inc. and each of the financial institutions (the Lenders), pursuant to which we have granted each of the Lenders a security interest in certain of our investment securities accounts. The collateral is
maintained in a pooled custody account pursuant to the terms of a control agreement and is to be administered under an intercreditor agreement among the Lenders. Under certain circumstances, individual Lenders may require that collateral be
transferred from the pooled account into segregated accounts for the benefit of such individual Lenders.

The primary uses of
the lines of credit would be to meet short-term funding requirements related to deposit account overdrafts and client fund obligations arising from electronic payment transactions on behalf of our clients in the ordinary course of business, if
necessary. No amounts were outstanding against these lines of credit during fiscal 2012 or as of May 31, 2012.

JP Morgan
Chase Bank, N.A. and Bank of America, N.A. are also parties to our irrevocable standby letters of credit, which are discussed below.

Letters of credit: As of May 31, 2012, we had irrevocable standby letters of credit outstanding totaling $46.8 million, required to secure commitments for
certain of our insurance policies. The letters of credit expire at various dates between July 2012 and December 2012, and are collateralized by securities held in our investment portfolios. No amounts were outstanding on these letters of credit
during fiscal 2012 or as of May 31, 2012. Subsequent to May 31, 2012, the letter of credit expiring in July 2012 was renewed and will expire in July 2013.

Other commitments: We have entered into various
operating leases and purchase obligations that, under GAAP, are not reflected on the Consolidated Balance Sheets as of May 31, 2012. The table below summarizes our estimated annual payment obligations under these commitments as of May 31,
2012:

Payments due by period

In millions

Total

Less than1
year

1-3 years

4-5 years

More than5
years

Operating leases(1)

$

154.9

$

38.9

$

59.6

$

35.0

$

21.4

Purchase obligations(2)

88.4

47.8

37.1

3.0

0.5

Total

$

243.3

$

86.7

$

96.7

$

38.0

$

21.9

(1)

Operating leases are primarily for office space and equipment used in our branch operations.

(2)

Purchase obligations include our estimate of the minimum outstanding commitments under purchase orders to buy goods and services and legally binding contractual
arrangements with future payment obligations. Included in the total purchase obligations is $7.6 million of commitments to purchase capital assets. Amounts actually paid under certain of these arrangements may be higher due to variable
components of these agreements.

The liability for uncertain tax positions was approximately $36.8 million as of
May 31, 2012. Refer to Note I of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for more information on income taxes. We are not able to reasonably estimate the timing of future cash flows related to
this liability and have excluded it from the table above. We are currently under a state income tax audit for the fiscal years ended May 31, 2004 through 2009. On July 14, 2010, we received a summary of proposed tax adjustments from the
New York State Department of Taxation and Finance, which was in excess of the reserve recorded as of May 31, 2012. The outcome of the audit and the timing of settlement, if any, are subject to significant uncertainty. It is not possible to
reasonably estimate the impact, if any, if resolution is ultimately unfavorable to us.

Certain deferred compensation plan
obligations and other long-term liabilities reported in our Consolidated Balance Sheets amounting to $52.9 million are excluded from the table above because the timing of actual payments cannot be specifically or reasonably determined due to
the variability in assumptions required to project the timing of future payments.

Advantage Payroll Services Inc.
(Advantage) has license agreements with independently owned associate offices (Associates), which are responsible for selling and marketing Advantage payroll services and performing certain operational functions, while
Paychex and Advantage provide all centralized back-office payroll processing and payroll tax administration services. Under these arrangements, Advantage pays the Associates commissions based on processing activity for the related clients. When we
acquired Advantage, there were fifteen Associates. Over the past few years, arrangements with some Associates have been discontinued, and there are currently fewer than ten Associates. Since the actual amounts of future payments are uncertain,
obligations under these arrangements are not included in the table above. Commission expense for the Associates for fiscal years 2012, 2011, and 2010 was $11.7 million, $10.4 million, and $9.9 million, respectively.

In the normal course of business, we make representations and warranties that guarantee the performance of services under service
arrangements with clients. Historically, there have been no material losses related to such guarantees. In addition, we have entered into indemnification agreements with our officers and directors, which require us to defend and, if necessary,
indemnify these individuals for certain pending or future legal claims as they relate to their services provided to us.

We
currently self-insure the deductible portion of various insured exposures under certain employee benefit plans. Our estimated loss exposure under these insurance arrangements is recorded in other current liabilities on our Consolidated Balance
Sheets. Historically, the amounts accrued have not been material. We also maintain insurance coverage in addition to our purchased primary insurance policies for gap coverage for employment practices liability, errors and omissions, warranty
liability, theft and embezzlement, and acts of terrorism; and capacity for deductibles and self-insured retentions through our captive insurance company.

As part of our ongoing business, we do not participate in transactions with unconsolidated entities which would have been established for
the purpose of facilitating off-balance sheet arrangements or other limited purposes. We do maintain investments as a limited partner in low-income housing projects that are not considered part of our ongoing operations. These investments are
accounted for under the equity method of accounting and are less than 1% of our total assets as of May 31, 2012.

Operating Cash Flow
Activities

Year ended May 31,

In millions

2012

2011

2010

Net income

$

548.0

$

515.3

$

477.0

Non-cash adjustments to net income

175.1

166.5

161.3

Cash (used in)/provided by changes in operating assets and liabilities

(16.5

)

33.5

(27.4

)

Net cash provided by operating activities

$

706.6

$

715.3

$

610.9

The decrease in our operating cash flows for fiscal 2012 resulted mainly from fluctuations in operating
assets and liabilities, partially offset by higher net income adjusted for non-cash items. The increase in our operating cash flows for fiscal 2011 resulted mainly from increases in net income and fluctuations in operating assets and liabilities.
The fluctuations in our operating assets and liabilities between periods for both fiscal 2012 and fiscal 2011 were primarily related to the timing of collections from clients and payments for compensation, PEO payroll, income tax, and other
liabilities.

Investing Cash Flow Activities

Year ended May 31,

In millions

2012

2011

2010

Net change in funds held for clients and corporate investment activities

$

(1,147.4

)

$

(179.8

)

$

(341.2

)

Purchases of property and equipment, net of proceeds from the sale of property and equipment

(89.6

)

(100.5

)

(61.3

)

(Acquisition)/sale of businesses

(6.0

)

(126.4

)

13.1

Purchases of other assets

(1.3

)

(2.8

)

(11.9

)

Net cash used in investing activities

$

(1,244.3

)

$

(409.5

)

$

(401.3

)

Funds held for clients and corporate investments: Funds held for
clients consist of short-term funds and available-for-sale securities. Corporate investments are primarily comprised of available-for-sale securities. The portfolio of funds held for clients and corporate investments is detailed in Note E of
the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K.

The fluctuation in the net
change in funds held for clients and corporate investment activities for fiscal 2012 as compared to fiscal 2011 is largely due to timing within the client funds portfolio, as there was a large inflow of collections on May 31, 2012 that was
invested primarily in short-term investments on that date. See further discussion of this timing in the financing cash flows discussion of net change in client fund obligations. In addition, we increased our investment in longer-term
available-for-sale securities within our corporate portfolio in fiscal 2012.

The fluctuation in the net change in funds held
for clients and corporate investment activities for fiscal 2011 as compared to fiscal 2010 was related to the mix of investment securities. In fiscal 2011, we continued to increase our investment in VRDNs and the amounts of purchases and sales for
available-for-sale securities increased. However, partially offsetting this impact was the related liquidation of cash equivalents and the impact on cash equivalents from timing of remittances within the funds held for clients portfolio as
compared to collections surrounding the fiscal year-end. See further discussion of this timing in the financing cash flows discussion of net change in client fund obligations.

In general, fluctuations in net funds held for clients and corporate investment activities
primarily relate to timing of purchases, sales, or maturities of investments. The amount of funds held for clients will vary based upon the timing of collection of client funds, and the related remittance of funds to applicable tax or regulatory
agencies for payroll tax administration services and to employees of clients utilizing employee payment services. Additional discussion of interest rates and related risks is included in the Market Risk Factors section, contained in
Item 7A of this Form 10-K.

Purchases of long-lived assets: To support our
continued client and ancillary product growth, purchases of property and equipment were made for data processing equipment and software, and for the expansion and upgrade of various operating facilities. During fiscal years 2012, 2011, and 2010, we
purchased approximately $2.6 million, $5.7 million, and $3.2 million, respectively, of data processing equipment and software from EMC Corporation. The Chairman, President, and Chief Executive Officer of EMC Corporation is a member of
our Board of Directors (the Board).

During fiscal 2012, we had an immaterial business acquisition. During fiscal
2011, we paid $126.4 million for the acquisitions of SurePayroll and ePlan. During fiscal 2010, we received $13.1 million from the sale of Stromberg, an immaterial component of the Company. The purchases of other assets were for customer lists.

Net change in client fund obligations: The client fund obligations
liability will vary based on the timing of collecting client funds, and the related required remittance of funds to applicable tax or regulatory agencies for payroll tax administration services and to employees of clients utilizing employee payment
services. Collections from clients are typically remitted from one to 30 days after receipt, with some items extending to 90 days.

The fluctuation in net change in client fund obligations for fiscal 2012 compared to fiscal 2011 is the result of timing of collections and remittances as May 31, 2012 fell on a Thursday, a large
collection day for direct pay funds. These funds were then paid out on Friday, June 1, 2012. In 2011, May 31 fell on a Tuesday, and there were fewer collections from clients on that day. In addition, overall client fund balances were
7% higher on average for fiscal 2012 than for fiscal 2011.

The fluctuation in net change in client fund obligations for fiscal
2011 as compared to fiscal 2010 is the result of timing of collections and remittances surrounding the Federal holiday on May 31, 2010, offset by an increase in average client collections primarily due to higher state unemployment insurance
rates. As May 31, 2010 was a Federal holiday, client fund obligations were higher as collections were made on Friday, May 28, 2010 that were not remitted to client employees and tax or regulatory agencies until June 2010. This resulted in
a positive cash flow impact for fiscal 2010. May 31, 2011 did not fall on a Federal holiday, so we did not have the same level of client fund holdings at the end of fiscal 2011.

Dividends paid: In October 2011, the Board increased our quarterly dividend to stockholders by 3% to
$0.32 per share from $0.31 per share. A quarterly dividend of $0.31 per share was paid to stockholders of record during the first quarter of fiscal 2012 and the fiscal years 2011 and 2010. The dividends paid as a percentage of net income totaled
84%, 87%, and 94% for those respective fiscal years. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board.

Exercise of stock options: Proceeds from exercise and
excess tax benefit related to stock-based awards increased for both fiscal 2012 and fiscal 2011 compared to the respective prior years. Common shares acquired through exercise of stock options were 0.2 million shares for fiscal 2012 and
0.4 million shares for both fiscal 2011 and 2010. The increase in proceeds for fiscal 2011 was the result of a higher average exercise price than for fiscal 2012 or 2010. Refer to Note D of the Notes to Consolidated Financial Statements,
contained in Item 8 of this Form 10-K, for additional disclosures on our stock-based compensation incentive plans.

Other

Recently adopted accounting pronouncements: Refer to Note A of the Notes to
Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for a discussion of recently adopted accounting pronouncements.

Recently issued accounting pronouncements: At this time, we do not anticipate that recently issued accounting guidance that has not yet been adopted will have a
material impact on our consolidated financial statements. Refer to Note A of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for a discussion of recently issued accounting pronouncements.

Critical Accounting Policies

Note A of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, discusses the significant accounting policies of Paychex. Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments, and
assumptions that affect reported amounts of assets, liabilities, revenue, and expenses. On an ongoing basis, we evaluate the accounting policies and estimates used to prepare the consolidated financial statements. We base our estimates on historical
experience, future expectations, and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates. Certain accounting policies that are deemed critical to our results of
operations or financial position are discussed below.

Revenue recognition: Service
revenue is recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectibility is reasonably assured. Certain processing services are provided under annual
service arrangements with revenue recognized ratably over the service period. Our service revenue is largely attributable to payroll-related processing services where the fee is based on a fixed amount per processing period or a fixed amount per
processing period plus a fee per employee or transaction processed. The revenue earned from delivery service for the distribution of certain client payroll checks and reports is included in service revenue, and the costs for delivery are included in
operating expenses on the Consolidated Statements of Income. PEO revenue is included in service revenue and is reported net of direct costs billed and incurred, which include wages, taxes, benefit premiums, and claims of PEO worksite employees.

Interest on funds held for clients is earned primarily on funds that are collected from clients before due dates for payroll
tax administration services and for employee payment services, and invested until remittance to the applicable tax or regulatory agencies or client employees. These collections from clients are typically remitted from one to 30 days after
receipt, with some items extending to 90 days. The interest earned on these funds is included in total revenue on the Consolidated Statements of Income because the collecting, holding, and remitting of these funds are critical components of
providing these services. Interest on funds held for clients also includes net realized gains and losses from the sales of available-for-sale securities.

PEO workers compensation insurance: Workers compensation insurance reserves are established to provide for the estimated costs of paying claims
underwritten by us. These reserves include estimates for reported losses, plus amounts for those claims incurred but not reported and estimates of certain expenses associated with processing and settling the claims. In establishing the workers
compensation insurance reserves, we use an independent actuarial estimate of undiscounted future cash payments that would be made to settle the claims.

Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss experience and actuarial loss projections, and is subject to change due to multiple factors,
including economic

trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as reported in the consolidated financial statements. Accordingly, final claim
settlements may vary from our present estimates, particularly when those payments may not occur until well into the future.

We
regularly review the adequacy of our estimated workers compensation insurance reserves. Adjustments to previously established reserves are reflected in our results of operations for the period in which the adjustment is identified. Such
adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.

Goodwill and
other intangible assets: We have $517.4 million and $513.7 million of goodwill recorded on our Consolidated Balance Sheets as of May 31, 2012 and May 31, 2011, respectively, resulting from acquisitions
of businesses. The increase in goodwill was due to an immaterial business acquisition during fiscal 2012.

Goodwill is not
amortized, but instead is tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. During
fiscal 2012, we adopted guidance that allows us the option to perform a qualitative assessment to determine if it is more-likely-than-not that the fair value of the reporting unit has declined below carrying value. This assessment considers various
financial, macroeconomic, industry, and reporting unit specific qualitative factors. Our business is largely homogeneous and, as a result, substantially all of the goodwill is associated with one reporting unit. We perform our annual impairment
testing in our fiscal fourth quarter. Based on the results of our reviews, no impairment loss was recognized in the results of operations for fiscal years 2012, 2011, or 2010. Subsequent to this review, there have been no events or circumstances
that indicate any potential impairment of our goodwill balance.

We also test intangible assets for potential impairment when
events or changes in circumstances indicate that the carrying value may not be recoverable.

Stock-based compensation
costs: All stock-based awards to employees, including grants of stock options, are recognized as compensation costs in our consolidated financial statements based on their fair values measured as of the date of grant.
We estimate the fair value of stock option grants using a Black-Scholes option pricing model. This model requires various assumptions as inputs including expected volatility of the Paychex stock price and expected option life. We estimate volatility
based on a combination of historical volatility using weekly stock prices over a period equal to the expected option life and implied market volatility. Expected option life is estimated based on historical exercise behavior.

We are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest. Our assumptions for
forfeitures were determined based on type of award and historical experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified, with any adjustment recorded in the period of change, and the final adjustment
at the end of the requisite service period to equal actual forfeitures.

The assumptions of volatility, expected option life,
and forfeitures all require significant judgment and are subject to change in the future due to factors such as employee exercise behavior, stock price trends, and changes to type or provisions of stock-based awards. Any change in one or more of
these assumptions could have a material impact on the estimated fair value of a future award.

We have determined that the
Black-Scholes option pricing model, as well as the underlying assumptions used in its application, is appropriate in estimating the fair value of stock option grants. We periodically reassess our assumptions as well as our choice of valuation model,
and will reconsider use of this model if additional information becomes available in the future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.

Income taxes: We account for deferred taxes by recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which

the differences are expected to reverse. We record a deferred tax asset related to the stock-based compensation costs recognized for certain stock-based awards. At the time of exercise of
non-qualified stock options or vesting of stock awards, we account for the resulting tax deduction by reducing our accrued income tax liability with an offset to the deferred tax asset and any excess tax benefit increasing additional paid-in
capital. We currently have a sufficient pool of excess tax benefits in additional paid-in capital to absorb any deficient tax benefits related to stock-based awards.

We maintain a reserve for uncertain tax positions. We evaluate tax positions taken or expected to be taken in a tax return for recognition in our consolidated financial statements. Prior to recording
the related tax benefit in our consolidated financial statements, we must conclude that tax positions must be more-likely-than-not to be sustained, assuming those positions will be examined by taxing authorities with full knowledge of all
relevant information. The benefit recognized in our consolidated financial statements is the amount we expect to realize after examination by taxing authorities. If a tax position drops below the more-likely-than-not standard, the benefit can
no longer be recognized. Assumptions, judgment, and the use of estimates are required in determining if the more-likely-than-not standard has been met when developing the provision for income taxes and in determining the expected benefit. A change
in the assessment of the more-likely-than-not standard could materially impact our results of operations or financial position. Our total reserve for uncertain tax positions was $36.8 million as of May 31, 2012 and $34.4 million as of
May 31, 2011. Refer to Note I of the Notes to Consolidated Financial Statements, contained in Item 8 of this Form 10-K, for further discussion of our reserve for uncertain tax positions.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk Factors

Changes in interest rates and interest rate
risk: Funds held for clients are primarily comprised of short-term funds and available-for-sale securities. Corporate investments are primarily comprised of available-for-sale securities. As a result of our investing
activities, we are exposed to changes in interest rates that may materially affect our results of operations and financial position. Changes in interest rates will impact the earnings potential of future investments and will cause fluctuations in
the fair value of our longer-term available-for-sale securities. We follow an investment strategy of protecting principal and optimizing liquidity. A substantial portion of our portfolios is invested in high credit quality securities with AAA and AA
ratings and A-1/P-1 ratings on short-term securities. We invest predominately in municipal bonds  general obligation bonds; pre-refunded bonds, which are secured by a U.S. government escrow; and essential services revenue bonds. We limit
the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair value is less sensitive to interest rate changes. We manage the available-for-sale securities to a benchmark duration of two and
one-half to three years.

During fiscal 2012, our primary short-term investment vehicles were VRDNs and FDIC-insured deposit
accounts. We have no exposure to high-risk or illiquid investments such as auction rate securities, sub-prime mortgage securities, asset-backed securities or asset-backed commercial paper, collateralized debt obligations, enhanced cash or cash plus
mutual funds, or structured investment vehicles (SIVs). We have insignificant exposure to European investments. We have not and do not utilize derivative financial instruments to manage our interest rate risk.

During fiscal 2012, the average interest rate earned on our combined funds held for clients and corporate investment portfolios was 1.1%,
compared with 1.3% for fiscal 2011 and 1.5% for fiscal 2010. When interest rates are falling, the full impact of lower interest rates will not immediately be reflected in net income due to the interaction of short- and long-term interest rate
changes. During a falling interest rate environment, the decreases in interest rates decrease earnings from our short-term investments, and over time decrease earnings from our longer-term available-for-sale securities. Earnings from the
available-for-sale-securities, which as of May 31, 2012 had an average duration of 3.0 years, would not reflect decreases in interest rates until the investments are sold or mature and the proceeds are reinvested at lower rates. In the next
twelve months, approximately 15% to 20% of our available-for-sale portfolio will mature, and it is currently anticipated that these proceeds will be reinvested at a lower average interest rate of approximately 1.1%.

The amortized cost and fair value of available-for-sale securities that had stated
maturities as of May 31, 2012 are shown below by contractual maturity. Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.

May 31, 2012

In millions

Amortized cost

Fair value

Maturity date:

Due in one year or less

$

323.1

$

325.8

Due after one year through three years

619.6

641.0

Due after three years through five years

630.2

655.7

Due after five years

1,426.6

1,436.5

Total

$

2,999.5

$

3,059.0

VRDNs are primarily categorized as due after five years in the table above as the contractual maturities
on these securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.

The Federal Funds rate remained at a range of zero to 0.25% throughout fiscal years 2012, 2011, and 2010.

Calculating the future effects of changing interest rates involves many factors. These factors include, but are not limited to:



daily interest rate changes;



seasonal variations in investment balances;



actual duration of short-term and available-for-sale securities;



the proportion of taxable and tax-exempt investments;



changes in tax-exempt municipal rates versus taxable investment rates, which are not synchronized or simultaneous; and



financial market volatility and the resulting effect on benchmark and other indexing interest rates.

Subject to these factors and under normal financial market conditions, a 25-basis-point change in taxable interest rates generally affects
our tax-exempt interest rates by approximately 17 basis points. Under normal financial market conditions, the impact to earnings from a 25-basis-point change in short-term interest rates would be in the range of $3.5 million to $4.0 million,
after taxes, for a twelve-month period. Such a basis point change may or may not be tied to changes in the Federal Funds rate.

Our total investment portfolio (funds held for clients and corporate investments) averaged approximately $4.3 billion for fiscal
2012. Our anticipated allocation is approximately 50% invested in short-term securities and VRDNs with an average duration of less than 30 days, and 50% invested in available-for-sale securities with an average duration of two and one-half to
three years. For fiscal 2013, we anticipate our average duration on our available-for-sale securities will increase to over three years.

The combined funds held for clients and corporate available-for-sale securities reflected a net unrealized gain of $59.5 million as of May 31, 2012, compared with an unrealized gain of
$59.3 million as of May 31, 2011. In determining fair value, we utilize the Interactive Data Pricing Service. During fiscal 2012, the net unrealized gain on our investment portfolios ranged from $46.4 million to $72.5 million. During
fiscal 2011, the net unrealized gain on our investment portfolios ranged from $41.4 million to $86.2 million. The net unrealized gain of our investment portfolios was approximately $58.0 million as of July 13, 2012.

As of May 31, 2012 and 2011, we had $3.1 billion and $2.7 billion, respectively, invested in available-for-sale securities
at fair value. The weighted-average yield-to-maturity was 2.2% and 2.6% as of May 31, 2012 and May 31, 2011, respectively. The weighted-average yield-to-maturity excludes available-for-sale securities tied to short-term interest rates such
as the VRDNs held as of May 31, 2012 and 2011. Assuming a hypothetical decrease

in both short-term and longer-term interest rates of 25 basis points, the resulting potential increase in fair value for our portfolio of available-for-sale securities as of May 31,
2012, would be approximately $16.0 million. Conversely, a corresponding increase in interest rates would result in a comparable decrease in fair value. This hypothetical increase or decrease in the fair value of the portfolio would be recorded
as an adjustment to the portfolios recorded value, with an offsetting amount recorded in stockholders equity. These fluctuations in fair value would have no related or immediate impact on the results of operations, unless any declines in
fair value were considered to be other-than-temporary and an impairment loss recognized.

Credit
risk: We are exposed to credit risk in connection with these investments through the possible inability of borrowers to meet the terms of their bonds. We regularly review our investment portfolios to determine if any
investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held as of May 31, 2012 were not other-than-temporarily impaired. While $180.0 million of our
available-for-sale securities had fair values that were below amortized cost, we believe that it is probable that the principal and interest will be collected in accordance with the contractual terms, and that the unrealized loss of $0.3 million was
due to changes in interest rates and was not due to increased credit risk or other valuation concerns. Substantially all of the securities in an unrealized loss position as of May 31, 2012 and 2011 held an AA rating or better. We do not intend
to sell these investments until the recovery of their amortized cost basis or maturity, and further believe that it is not more-likely-than-not that we will be required to sell these investments prior to that time. Our assessment that an investment
is not other-than-temporarily impaired could change in the future due to new developments or changes in our strategies or assumptions related to any particular investment.

Management of Paychex, Inc. (the Company) is responsible for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of the Consolidated Financial Statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, and careful selection and
training of qualified personnel.

Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Audit Committee of our Companys Board of Directors meets with the independent registered public accounting firm, management, and internal auditors periodically to discuss internal control over
financial reporting and auditing and financial reporting matters. The Audit Committee reviews with the independent registered public accounting firm the scope and results of the audit effort. The Audit Committee also meets periodically with the
independent registered public accounting firm and the chief internal auditor without management present to ensure that the independent registered public accounting firm and the chief internal auditor has free access to the Audit Committee. The Audit
Committees Report can be found in the Definitive Proxy Statement to be issued in connection with the Companys 2012 Annual Meeting of Stockholders.

Management assessed the effectiveness of the Companys internal control over financial reporting as of May 31, 2012. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control  Integrated Framework. Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of
May 31, 2012.

The Companys independent registered public accounting firm, Ernst & Young LLP, is appointed
by the Companys Audit Committee. Ernst & Young LLP has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K, and as a part of their audit, has issued their report, included herein, on the
effectiveness of the Companys internal control over financial reporting.

We have audited Paychex, Inc.s internal control over financial reporting as of
May 31, 2012, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Paychex, Inc.s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Managements Assessment of Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, Paychex, Inc. maintained, in all material respects, effective
internal control over financial reporting as of May 31, 2012, based on the COSO criteria.

We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Paychex, Inc. as of May 31, 2012 and 2011, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the period ended May 31, 2012 of Paychex, Inc., and our report dated July 20, 2012, expressed an unqualified opinion thereon.

We have audited the accompanying consolidated balance sheets of Paychex, Inc. as of May 31, 2012 and 2011,
and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended May 31, 2012. Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of Paychex, Inc.s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Paychex, Inc. at May 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2012, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Paychex, Inc.s internal control over financial reporting as of May 31, 2012, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated July 20, 2012 expressed an unqualified opinion thereon.

Description of business: Paychex, Inc. and its
wholly owned subsidiaries (the Company or Paychex) is a leading provider of payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses in the United States (U.S.). The
Company also has a subsidiary in Germany.

Paychex, a Delaware corporation formed in 1979, reports as one segment.
Substantially all of the Companys revenue is generated within the U.S. The Company also generates revenue within Germany, which was less than one percent of its total revenue for each of the years ended May 31, 2012 (fiscal
2012), 2011 (fiscal 2011), and 2010 (fiscal 2010). Long-lived assets in Germany are insignificant in relation to total long-lived assets of the Company as of May 31, 2012 and May 31, 2011.

Total revenue is comprised of service revenue and interest on funds held for clients. Service revenue is comprised of the Payroll and
Human Resource Services portfolios of services and products. Payroll service revenue is earned primarily from payroll processing, payroll tax administration services, employee payment services, and other ancillary services. Payroll processing
services include the calculation, preparation, and delivery of employee payroll checks; production of internal accounting records and management reports; preparation of federal, state, and local payroll tax returns; and collection and remittance of
clients payroll obligations.

In connection with the automated payroll tax administration services,
the Company electronically collects payroll taxes from clients bank accounts, typically on payday, prepares and files the applicable tax returns, and remits taxes to the applicable tax or regulatory agencies on the respective due dates. These
taxes are typically paid between one and 30 days after receipt of collections from clients, with some items extending to 90 days. The Company handles regulatory correspondence, amendments, and penalty and interest disputes, and is subject
to cash penalties imposed by tax or regulatory agencies for late filings and late or under payment of taxes. With employee payment services, employers are offered the option of paying their employees by direct deposit, payroll debit card, a check
drawn on a Paychex account (Readychex®), or a check drawn on the employers account and electronically
signed by Paychex. For the first three methods, Paychex electronically collects net payroll from the clients bank accounts, typically one business day before payday, and provides payment to the employees on payday.

In addition to service fees paid by clients, the Company earns interest on funds held for clients that are collected before due dates and
invested until remittance to the applicable tax or regulatory agencies or client employees. The funds held for clients and related client fund obligations are included in the Consolidated Balance Sheets as current assets and current liabilities. The
amount of funds held for clients and related client fund obligations varies significantly during the year.

The Human Resource
Services portfolio of services and products provides small- to medium-sized businesses with retirement services administration, insurance services, eServices, and other human resource services and products. Paychex HR Solutions is available through
an administrative services organization (ASO) and a professional employer organization (PEO). Both options offer businesses a combined package of services that includes payroll, employer compliance, human resource and
employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained human resource services representative, among other services. These comprehensive bundles of services are designed to make it
easier for businesses to manage their payroll and related benefits costs while providing a benefits package equal to that of larger companies. The PEO differs from the ASO in that Paychex serves as a co-employer of the clients employees,
assumes the risks and rewards of workers compensation insurance, and offers health care coverage to PEO client employees. PEO services are sold through the Companys registered and licensed subsidiary, Paychex Business Solutions, Inc.
Paychex HR Essentials is an ASO product that provides support to the Companys clients over the phone or online to help manage employee-related topics.

Basis of presentation: The consolidated financial
statements include the accounts of Paychex, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company has evaluated subsequent events for potential recognition and/or
disclosure through the date of issuance of these financial statements.

Cash and cash equivalents: Cash and cash
equivalents consist of available cash, money market securities, U.S. agency discount notes, and other investments with a maturity of three months or less at acquisition.

Accounts receivable, net of allowance for doubtful
accounts: Accounts receivable balances are shown on the Consolidated Balance Sheets net of the allowance for doubtful accounts of $1.2 million as of May 31, 2012 and $2.1 million as of May 31, 2011.
Accounts receivable are written off and charged against the allowance for doubtful accounts when the Company has exhausted all collection efforts without success. No single client had a material impact on total accounts receivable, service revenue,
or results of operations.

Funds held for clients and corporate investments: Marketable
securities included in funds held for clients and corporate investments consist primarily of securities classified as available-for-sale and are recorded at fair value obtained from an independent pricing service. The funds held for clients
portfolio also includes cash, money market securities, and short-term investments. Unrealized gains and losses, net of applicable income taxes, are reported as other comprehensive income in the Consolidated Statements of Stockholders Equity.
Realized gains and losses on the sale of available-for-sale securities are determined by specific identification of the cost basis of each security. On the Consolidated Statements of Income, realized gains and losses from their respective portfolios
are included in interest on funds held for clients and investment income, net.

Concentrations: Substantially all of the Companys
deposited cash is maintained at two large well-capitalized financial institutions. These deposits may exceed the amount of any insurance provided. All of the Companys deliverable securities are held in custody with one of the two
aforementioned financial institutions, for which that institution bears the risk of custodial loss. Non-deliverable securities, primarily time deposits and money market mutual funds, are restricted to well-capitalized financial institutions.

Property and equipment, net of accumulated
depreciation: Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation is based on the estimated useful lives of property and equipment using the straight-line method. The
estimated useful lives of depreciable assets are generally:

Category

Depreciable life

Buildings and improvements

Ten to 35 years or the remaining life, whichever is shorter

Data processing equipment

Two to seven years

Furniture, fixtures, and equipment

Seven years

Leasehold improvements

Ten years or the life of the lease, whichever is shorter

Normal and recurring repairs and maintenance costs are charged to expense as incurred. The Company reviews
the carrying value of property and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Software development and enhancements: Expenditures
for software purchases and software developed for internal use are capitalized and depreciated on a straight-line basis over the estimated useful lives, which are generally three to fifteen years. For software developed for internal use, certain
costs are capitalized, including external direct costs of materials and services associated with developing or obtaining the software, and payroll and payroll-related costs for employees who are directly associated with internal-use software
projects. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Costs associated with preliminary project stage activities, training, maintenance, and other
post-implementation stage activities are expensed as incurred. The carrying value of software and development costs is reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be
recoverable.

Goodwill and other intangible assets, net of accumulated
amortization: The Company has recorded goodwill in connection with the acquisitions of businesses. Goodwill is not amortized, but instead is tested for impairment on an annual basis and between annual tests if an event
occurs or circumstances change in a way to indicate that there has been a potential decline in the fair value of the reporting unit. Impairment is determined by comparing the estimated fair value of the reporting unit to its carrying amount,
including goodwill. During fiscal 2012, the Company adopted guidance that allows it the option to perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit has declined below carrying
value. This assessment considers various financial, macroeconomic, industry, and reporting unit specific qualitative factors. The Companys business is largely homogeneous and, as a result, substantially all the goodwill is associated with one
reporting unit. The Company performs its annual impairment testing in its fiscal fourth quarter. Based on the results of the Companys reviews, no impairment loss was recognized in the results of operations for fiscal years 2012, 2011, or 2010.
Subsequent to the latest review, there have been no events or circumstances that indicate any potential impairment of the Companys goodwill balance.

Intangible assets are comprised primarily of client list acquisitions and are reported net of accumulated amortization on the Consolidated Balance Sheets. Intangible assets are amortized over periods
generally ranging from five to twelve years using either the straight-line method or an accelerated method. The Company tests intangible assets for potential impairment when events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable.

Revenue recognition: Service revenue is recognized in
the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectibility is reasonably assured. Certain processing services are provided under annual service arrangements
with revenue recognized ratably over the service period. The Companys service revenue is largely attributable to payroll-related processing services where the fee is based on a fixed amount per processing period or a fixed amount per
processing period plus a fee per employee or transaction processed. The revenue earned from delivery service for the distribution of certain client payroll checks and reports is included in service revenue, and the costs for the delivery are
included in operating expenses on the Consolidated Statements of Income.

PEO revenue is included in service revenue and is
reported net of direct costs billed and incurred, which include wages, taxes, benefit premiums, and claims of PEO worksite employees. Direct costs billed and incurred were $3.3 billion for fiscal 2012, $3.9 billion for fiscal 2011, and $3.1
billion for fiscal 2010.

Interest on funds held for clients is earned primarily on funds that are collected from clients
before due dates for payroll tax administration services and for employee payment services, and invested until remittance to the applicable tax or regulatory agencies or client employees. These collections from clients are typically remitted from
one to 30 days after receipt, with some items extending to 90 days. The interest earned on these funds is included in total revenue on the Consolidated Statements of Income because the collecting, holding, and remitting of these funds are
components of providing these services. Interest on funds held for clients also includes net realized gains and losses from the sales of available-for-sale securities.

PEO workers compensation
insurance: Workers compensation insurance for PEO worksite employees is provided under a deductible workers compensation policy with a national insurance company. Workers compensation insurance
reserves are established to provide for the estimated costs of paying claims underwritten by the Company. These reserves include estimates for reported losses, plus amounts for those claims incurred but not reported, and estimates of certain
expenses associated with processing and settling the claims. In establishing the workers compensation insurance reserves, the Company uses an independent actuarial estimate of undiscounted future cash payments that would be made to settle the
claims.

Estimating the ultimate cost of future claims is an uncertain and complex process based upon historical loss
experience and actuarial loss projections, and is subject to change due to multiple factors, including economic trends, changes in legal liability law, and damage awards, all of which could materially impact the reserves as

reported in the consolidated financial statements. Accordingly, final claim settlements may vary from the present estimates, particularly when those payments may not occur until well into the
future.

The Company regularly reviews the adequacy of its estimated workers compensation insurance reserves. Adjustments
to previously established reserves are reflected in the results of operations for the period in which the adjustment is identified. Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.

The Companys maximum individual claims liability was $1.0 million under both its fiscal 2012 and fiscal 2011 policies.
As of May 31, 2012 and May 31, 2011, the Company had recorded current liabilities of $6.2 million and $7.3 million, respectively, and long-term liabilities of $19.0 million and $20.6 million, respectively, on its Consolidated Balance
Sheets for workers compensation costs.

Stock-based compensation
costs: All stock-based awards to employees are recognized as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. The Company estimates the fair value
of stock option grants using a Black-Scholes option pricing model. This model requires various assumptions as inputs including expected volatility of the Paychex stock price and expected option life. Volatility is estimated based on a combination of
historical volatility using weekly stock prices over a period equal to the expected option life and implied market volatility. Expected option life is estimated based on historical exercise behavior.

The fair value of stock awards is determined based on the stock price at the date of grant. For grants that do not accrue dividends or
dividend equivalents, the fair value is the stock price reduced by the present value of estimated dividends over the vesting period or performance period.

The Company is required to estimate forfeitures and only record compensation costs for those awards that are expected to vest. The assumptions for forfeitures were determined based on type of award and
historical experience. Forfeiture assumptions are adjusted at the point in time a significant change is identified, with any adjustment recorded in the period of change, and the final adjustment at the end of the requisite service period to equal
actual forfeitures.

The assumptions of volatility, expected option life, and forfeitures all require significant judgment and
are subject to change in the future due to factors such as employee exercise behavior, stock price trends, and changes to type or provisions of stock-based awards. Any change in one or more of these assumptions could have a material impact on the
estimated fair value of a future award.

The Company has determined that the Black-Scholes option pricing model, as well as the
underlying assumptions used in its application, is appropriate in estimating the fair value of stock option grants. The Company periodically reassesses its assumptions as well as its choice of valuation model, and will reconsider use of this model
if additional information becomes available in the future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.

Refer to Note D for further discussion of the Companys stock-based compensation plans.

Income taxes: The Company accounts for deferred taxes by
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company records a deferred tax asset
related to the stock-based compensation costs recognized for certain stock-based awards. At the time of the exercise of non-qualified stock options or vesting of stock awards, the Company accounts for the resulting tax deduction by reducing its
accrued income tax liability with an offset to the deferred tax asset and any excess tax benefit increasing additional paid-in capital. The Company currently has a sufficient pool of excess tax benefits in additional paid-in capital to absorb any
deficient tax benefits related to stock-based awards.

The Company also maintains a reserve for uncertain tax positions. The Company evaluates
tax positions taken or expected to be taken in a tax return for recognition in its consolidated financial statements. Prior to recording the related tax benefit in the consolidated financial statements, the Company must conclude that tax positions
must be more-likely-than-not to be sustained, assuming those positions will be examined by taxing authorities with full knowledge of all relevant information. The benefit recognized in the consolidated financial statements is the amount the Company
expects to realize after examination by taxing authorities. If a tax position drops below the more-likely-than-not standard, the benefit can no longer be recognized. Assumptions, judgment, and the use of estimates are required in determining if the
more-likely-than-not standard has been met when developing the provision for income taxes and in determining the expected benefit. A change in the assessment of the more-likely-than-not standard could materially impact the Companys results of
operations or financial position. The Companys reserve for uncertain tax positions was $36.8 million as of May 31, 2012 and $34.4 million as of May 31, 2011. Refer to Note I for further discussion of the Companys
reserve for uncertain tax positions.

Use of estimates: The preparation of financial statements in
conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates, judgments, and assumptions that affect reported amounts of assets, liabilities, revenue, and expenses during the reporting
period. Actual amounts and results could differ from these estimates.

Recently adopted accounting
pronouncements: Effective June 1, 2011, the Company adopted the following Financial Accounting Standards Board (FASB) authoritative guidance, none of which had a material impact on its consolidated
financial statements:



Guidance on the timing and method required to perform certain steps in the periodic goodwill impairment test for public entities that may have
reporting units with zero or negative carrying amounts;



Guidance to clarify the reporting of pro forma financial information related to business combinations of public entities and to expand certain
supplemental pro forma disclosures;



Guidance for arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance; and



Guidance eliminating tangible products containing both software and non-software components that operate together to deliver a products
functionality from the scope of current GAAP for software.

During fiscal 2012, the Company adopted the
following FASB authoritative guidance, neither of which had a material impact on its consolidated financial statements:



Guidance that amended certain measurement and disclosure requirements related to fair value measurements to improve consistency with international
reporting standards;



Guidance that allows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it
is necessary to perform the two-step goodwill impairment test.

Recently issued accounting
pronouncements: In June 2011, the FASB issued new guidance on the presentation of comprehensive income. This guidance will require a company to present components of net income and other comprehensive income in
one continuous statement or in two separate, but consecutive statements. There are no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. It is applicable to the Companys fiscal year beginning June 1, 2012. The Company is currently evaluating this guidance, but
does not expect its adoption will have a material effect on its consolidated financial statements.

Other recent authoritative guidance issued by the FASB (including technical corrections
to the FASB Accounting Standards Codification), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (SEC) did not, or are not expected to have a material effect on the Companys
consolidated financial statements.

Note B  Basic and Diluted Earnings Per Share

Basic and diluted earnings per share were calculated as follows:

Year ended May 31,

In millions, except per share amounts

2012

2011

2010

Basic earnings per share:

Net income

$

548.0

$

515.3

$

477.0

Weighted-average common shares outstanding

362.4

361.8

361.4

Basic earnings per share

$

1.51

$

1.42

$

1.32

Diluted earnings per share:

Net income

$

548.0

$

515.3

$

477.0

Weighted-average common shares outstanding

362.4

361.8

361.4

Dilutive effect of common share equivalents at average market price

0.6

0.6

0.3

Weighted-average common shares outstanding, assuming dilution

363.0

362.4

361.7

Diluted earnings per share

$

1.51

$

1.42

$

1.32

Weighted-average anti-dilutive common share equivalents

9.9

11.5

13.0

Weighted-average common share equivalents that had an anti-dilutive impact are excluded from the computation of diluted
earnings per share.

Note C  Business Combinations

During fiscal 2011, the Company acquired two software-as-a-service (SaaS) companies, opening up additional
areas of the markets the Company serves. Effective February 8, 2011, the Company acquired SurePayroll, Inc. (SurePayroll), a payroll processing provider for small businesses, for $114.9 million, net of cash acquired. The acquisition
of SurePayroll allowed the Company entry into a new area of the online market for small businesses, and resulted in $83.9 million of goodwill, which is not tax-deductible.

Effective May 3, 2011, the Company acquired ePlan Services, Inc. (ePlan), a provider of recordkeeping and administrative solutions to the defined contribution marketplace, for $15.2
million, net of cash acquired. The ePlan acquisition resulted in $7.4 million of goodwill, which is not tax-deductible.

Upon
their respective closing dates, both entities acquired became wholly owned subsidiaries of the Company. The financial results of SurePayroll and ePlan are included in the Companys consolidated financial statements from their respective dates
of acquisition. These acquisitions are not material to the Companys results of operations, financial position, or cash flows.

Note D  Stock-Based Compensation Plans

The Paychex, Inc. 2002 Stock Incentive Plan, as amended and restated (the 2002 Plan), effective on
October 13, 2010 upon its approval by the Companys stockholders, authorizes grants of up to 39.1 million shares of the Companys common stock. As of May 31, 2012, there were 23.4 million shares available for future
grants under the 2002 Plan. No future grants will be made pursuant to the Paychex, Inc. 1998 Stock Incentive Plan, which expired in August 2002; however, options to purchase an aggregate of 0.1 million shares under the plan remain outstanding
as of May 31, 2012.

All stock-based awards to employees are recognized as compensation costs in the
consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized as an expense in the Consolidated Statements of Income on a straight-line basis over the requisite service period and increase
additional paid-in capital.

Stock-based compensation expense was $22.9 million, $24.8 million, and $25.6 million for fiscal
years 2012, 2011, and 2010, respectively. Related income tax benefits recognized were $8.3 million, $8.4 million, and $7.9 million for the respective fiscal years. Capitalized stock-based compensation costs related to the development of internal use
software for these same fiscal years were not significant.

As of May 31, 2012, the total unrecognized compensation cost
related to all unvested stock-based awards was $43.8 million and is expected to be recognized over a weighted-average period of 2.9 years.

Black-Scholes fair value assumptions: The fair value of stock option grants and performance stock options was estimated at the date of grant using a Black-Scholes
option pricing model. The weighted-average assumptions used for valuation under the Black-Scholes model are as follows:

Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at the end of the
expected option life. The estimated volatility factor is based on a combination of historical volatility using weekly stock prices over a period equal to the expected option life and implied market volatility. The expected option life is based on
historical exercise behavior.

The Company has determined that the Black-Scholes option pricing model, as well as the
underlying assumptions used in its application, are appropriate in estimating the fair value of its stock option grants. The Company periodically assesses its assumptions as well as its choice of valuation model, and will reconsider use of this
model if additional information becomes available in the future indicating that another model would provide a more accurate estimate of fair value, or if characteristics of future grants would warrant such a change.

Stock option grants: Stock option grants entitle the holder to purchase, at the end of the vesting
term, a specified number of shares of Paychex common stock at an exercise price per share set equal to the closing market price of the common stock on the date of grant. All stock option grants have a contractual life of ten years from the date of
the grant and a vesting schedule as established by the Board of Directors (the Board). The Company issues new shares of common stock to satisfy stock option exercises. Non-qualified stock option grants to officers and outside directors
are typically approved by the Board in July. Non-qualified stock option grants to officers and employees granted prior to July 2010 vest 20% per annum, while grants to the Board prior to October 2010 vest one-third per annum. Grants of
non-qualified stock options to officers beginning in July 2010 vest 25% per annum. Grants to members of the Board beginning in October 2010 vest after one year.

The Company had granted stock options to virtually all non-management employees with at
least 90 days of service, and shares remain outstanding for the following broad-based stock option grants:

Date of broad-based grant

Sharesgranted(millions)

Exercisepriceper
share

Sharesoutstanding as
ofMay 31, 2012(millions)

Vesting schedule

April 2004

1.7

$

37.72

0.7

25% each April in 2005 through 2008

October 2006

2.0

$

37.32

1.1

20% each October in 2007 through 2011

The following table summarizes stock option activity for the three years ended May 31, 2012:

In millions, except per share amounts

Shares subjectto
options

Weighted-averageexercise
priceper share

Weighted-averageremainingcontractual term(years)

Aggregate intrinsicvalue(1)

Outstanding as of May 31, 2009

14.0

$

34.84

Granted

1.4

$

26.34

Exercised

(0.4

)

$

23.12

Forfeited

(0.4

)

$

33.35

Expired

(0.4

)

$

36.18

Outstanding as of May 31, 2010

14.2

$

34.31

Granted

0.5

$

26.83

Exercised

(0.4

)

$

28.58

Forfeited

(0.8

)

$

29.68

Expired

(1.0

)

$

39.41

Outstanding as of May 31, 2011

12.5

$

34.14

Granted

0.8

$

30.88

Exercised

(0.2

)

$

27.85

Forfeited

(0.3

)

$

29.45

Expired

(2.8

)

$

35.19

Outstanding as of May 31, 2012

10.0

$

33.88

4.3

$

4.8

Exercisable as of May 31, 2012

8.4

$

34.71

3.6

$

2.1

(1)

Market price of the underlying stock as of May 31, 2012 less the exercise price.

Other information pertaining to stock option grants is as follows:

Year ended May 31,

In millions, except per share amounts

2012

2011

2010

Total intrinsic value of stock options exercised

$

0.8

$

1.9

$

1.4

Total grant-date fair value of stock options vested

$

10.4

$

20.0

$

19.0

Performance stock options: In July 2011, the Board approved a special award of
performance-based stock options under a Long-Term Incentive Plan. Under this award, stock options were granted to officers with vesting dependent on achievement against long-term strategic and financial objectives. The awards will vest in full if
performance targets for the fiscal year ended May 31, 2016 are achieved. Acceleration of vesting for up to one-half of the award will occur if performance targets for the fiscal year ending May 31, 2014 are achieved. There also is an
opportunity to vest in one-half of the award at threshold performance, which is 95% of target.

The following table summarizes performance stock option activity for the year ended
May 31, 2012:

In millions, except per share amounts

Shares subjectto
options

Weighted-averageexercise price
pershare

Weighted-averageremainingcontractual term(years)

Aggregate intrinsicvalue (2)

Outstanding as of May 31, 2011



$



Granted(1)

2.7

$

30.83

Exercised



$



Forfeited

(0.1

)

$

31.63

Expired



$



Outstanding as of May 31, 2012

2.6

$

30.80

9.2

$

1.2

Exercisable as of May 31, 2012



$





$



(1)

Performance stock options granted assuming achievement of performance goals at target. Actual amount of shares to be earned may differ from this amount.

(2)

Market price of the underlying stock as of May 31, 2012 less the exercise price.

Restricted stock units: Beginning in July 2007, the Board approved grants of
restricted stock units (RSUs) to non-officer management as a replacement of non-qualified stock options. For each unit granted, the holder will receive one share of stock at the time of vesting. RSUs do not have voting rights or earn
dividend equivalents during the vesting period. These awards vest 20% per annum over five years with a small population of awards vesting on the fourth anniversary of the grant date. The fair value of RSUs is equal to the closing market price
of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the vesting period.

The following table summarizes RSU activity for the three years ended May 31, 2012:

In millions, except per share amounts

RSUs

Weighted-averagegrant-datefair value pershare

Weighted-averageremaining vestingperiod (years)

Aggregate
intrinsicvalue (1)

Nonvested as of May 31, 2009

0.9

$

32.93

Granted

0.6

$

20.62

Vested

(0.2

)

$

34.01

Forfeited

(0.1

)

$

28.88

Nonvested as of May 31, 2010

1.2

$

27.39

Granted

0.6

$

21.52

Vested

(0.3

)

$

28.96

Forfeited

(0.1

)

$

25.08

Nonvested as of May 31, 2011

1.4

$

24.83

Granted

0.6

$

27.67

Vested

(0.3

)

$

26.87

Forfeited

(0.1

)

$

25.41

Nonvested as of May 31, 2012

1.6

$

25.49

1.5

$

46.8

(1)

An RSU is an agreement to issue shares at the time of vesting with no associated exercise cost. Therefore, intrinsic value for RSUs is the market price of the
underlying stock as of May 31, 2012.

Restricted stock awards: The Board has approved grants of restricted stock awards
to the Companys officers and outside directors. All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. The recipients of the restricted stock have voting rights and earn dividends,
which are paid to the recipient at the time of vesting of the awards. If the recipient leaves Paychex prior to the vesting date for any reason, the shares of restricted stock and the dividends accrued on those shares will be forfeited and returned
to Paychex.

For restricted stock awards granted to officers prior to July 2010, the shares vest upon the fifth anniversary of
the grant date provided the recipient is still an employee of the Company on that date. These awards have a provision for the acceleration of vesting based on achievement of performance targets established by the Board. If the established targets
are met for a fiscal year, up to one-third of the award may vest. If all the targets are met for three consecutive years, the award will be fully vested. Beginning in July 2010, time-vested restricted stock awards were granted to officers, which
vest one-third per annum over three years. For grants to outside directors prior to October 2010, the shares vest on the third anniversary of the grant date. Beginning in October 2010, restricted stock granted to outside directors vest on the
one-year anniversary of the grant date. The fair value of restricted stock awards is equal to the closing market price of the underlying common stock as of the date of grant and is expensed over the requisite service period on a straight-line basis.

The following table summarizes restricted stock activity for the three years ended May 31, 2012:

In millions, except per share amounts

Restrictedshares

Weighted-averagegrant-datefair value pershare

Nonvested as of May 31, 2009

0.2

$

36.74

Granted

0.2

$

24.60

Vested



$

35.79

Forfeited



$

32.66

Nonvested as of May 31, 2010

0.4

$

31.95

Granted

0.1

$

26.40

Vested

(0.1

)

$

35.60

Forfeited

(0.1

)

$

30.02

Nonvested as of May 31, 2011

0.3

$

29.88

Granted

0.1

$

30.69

Vested

(0.1

)

$

32.02

Forfeited

(0.1

)

$

29.36

Nonvested as of May 31, 2012

0.2

$

29.35

The total grant-date fair value of restricted stock vested was $3.2 million, $2.2 million, and $0.3 million for fiscal
years 2012, 2011, and 2010, respectively.

Performance shares: Beginning in July 2010, the
Board approved grants of restricted performance shares to officers. These awards have a two-year performance period, after which the amount of restricted shares earned will be determined based on achievement against established performance targets.
The restricted shares earned will then be subject to a one-year service period. Performance shares do not have voting rights or earn dividend equivalents during the performance period. The fair value of performance shares is equal to the closing
market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period.

The following table summarizes performance share activity for the two years ended May 31, 2012:

In millions, except per share amounts

Performanceshares

Weighted-averagegrant-datefair valueper share

Unearned performance shares as of May 31, 2010



$



Granted(1)

0.1

$

23.85

Forfeited



$

23.55

Unearned performance shares as of May 31, 2011

0.1

$

23.90

Granted(1)

0.1

$

28.87

Forfeited



$

25.38

Unearned performance shares as of May 31, 2012

0.2

$

26.83

(1)

Performance shares granted assuming achievement of performance goals at target. Actual amount of shares to be earned may differ from this amount.

Non-compensatory employee benefit plan: The Company offers an Employee Stock
Purchase Plan to all employees under which the Companys common stock can be purchased through a payroll deduction with no discount to the market price and no look-back provision. All transactions occur directly through the Companys
transfer agent and no brokerage fees are charged to employees, except for when stock is sold. The plan has been deemed non-compensatory and therefore, no stock-based compensation costs have been recognized for fiscal years 2012, 2011, or 2010
related to this plan.

Note E  Funds Held for Clients and Corporate Investments

Funds held for clients and corporate investments are as follows:

May 31, 2012

In millions

Amortizedcost

Grossunrealizedgains

Grossunrealizedlosses

Fairvalue

Type of issue:

Funds held for clients money market securities and other cash equivalents

Funds held for clients money market securities and other cash equivalents

$

1,372.9

$



$



$

1,372.9

Available-for-sale securities:

General obligation municipal bonds

1,017.5

33.1

(0.1

)

1,050.5

Pre-refunded municipal bonds(1)

470.5

14.2



484.7

Revenue municipal bonds

361.6

12.1



373.7

Variable rate demand notes

828.3





828.3

Total available-for-sale securities

2,677.9

59.4

(0.1

)

2,737.2

Other

8.3

0.6



8.9

Total funds held for clients and corporate investments

$

4,059.1

$

60.0

$

(0.1

)

$

4,119.0

(1)

Pre-refunded municipal bonds are secured by an escrow fund of U.S. government obligations.

Money market securities and other cash equivalents as of May 31, 2012 included short-term municipal bonds,
commercial paper, money market funds, Federal Deposit Insurance Corporation (FDIC) insured deposit accounts, and other bank demand deposit accounts, and as of May 31, 2011 included money market funds, U.S. agency discount notes, a
short-term municipal bond, FDIC-insured deposit accounts, and other bank demand deposit accounts. Within bank demand deposit accounts for funds held for clients, the Company maintained $13.7 million as of May 31, 2012 and $16.7 million as of
May 31, 2011 in a separately designated account for tax obligations of a partners clients.

Classification of
investments on the Consolidated Balance Sheets is as follows:

May 31,

In millions

2012

2011

Funds held for clients

$

4,544.2

$

3,566.7

Corporate investments

207.5

345.0

Long-term corporate investments

473.7

207.3

Total funds held for clients and corporate investments

$

5,225.4

$

4,119.0

The Companys available-for-sale securities reflected a net unrealized gain of $59.5 million as of
May 31, 2012 compared with a net unrealized gain of $59.3 million as of May 31, 2011. Included in the net unrealized gain as of May 31, 2012 and 2011, respectively, were 35 and 15 available-for-sale securities in an unrealized
loss position. The securities in an unrealized loss position, all of which were in a loss position for less than twelve consecutive months, were as follows:

The Company regularly reviews its investment portfolios to determine if any investment
is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The Company believes that the investments held as of May 31, 2012 that had unrealized losses of $0.3 million were not other-than-temporarily
impaired. The Company believes that it is probable that the principal and interest will be collected in accordance with contractual terms, and that the unrealized loss on these securities of $0.3 million was due to changes in interest rates and was
not due to increased credit risk or other valuation concerns. Substantially all of the securities in an unrealized loss position as of May 31, 2012, and all of those at May 31, 2011, held an AA rating or better. The Company does not intend
to sell these investments until the recovery of their amortized cost basis or maturity, and further believes that it is not more-likely-than-not that it will be required to sell these investments prior to that time. The Companys assessment
that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in the Companys strategies or assumptions related to any particular investment.

Realized gains and losses from the sale of available-for-sale securities were as follows:

Year ended May 31,

In millions

2012

2011

2010

Gross realized gains

$

1.0

$

1.3

$

3.2

Gross realized losses







Net realized gains

$

1.0

$

1.3

$

3.2

The amortized cost and fair value of available-for-sale securities that had stated maturities as of May 31, 2012
are shown below by contractual maturity. Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.

May 31, 2012

In millions

Amortizedcost

Fairvalue

Maturity date:

Due in one year or less

$

323.1

$

325.8

Due after one year through three years

619.6

641.0

Due after three years through five years

630.2

655.7

Due after five years

1,426.6

1,436.5

Total

$

2,999.5

$

3,059.0

VRDNs are primarily categorized as due after five years in the table above as the contractual maturities on these
securities are typically 20 to 30 years. Although these securities are issued as long-term securities, they are priced and traded as short-term instruments because of the liquidity provided through the tender feature.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down
into three levels based on reliability, as follows:



Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company can access at the measurement date.



Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for the instrument, either directly or
indirectly, for substantially the full term of the asset or liability including the following:



quoted prices for similar, but not identical, instruments in active markets;



quoted prices for identical or similar instruments in markets that are not active;



inputs other than quoted prices that are observable for the instrument; or



inputs that are derived principally from or corroborated by observable market data by correlation or other means.



Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.

The carrying values of cash and cash equivalents, including money market securities, accounts receivable, net of allowance for doubtful
accounts, and accounts payable approximate fair value due to the short maturities of these instruments. Marketable securities included in funds held for clients and corporate investments consist primarily of securities classified as
available-for-sale and are recorded at fair value on a recurring basis. Money market securities are classified as level 1 in the fair value hierarchy.

The Companys financial assets and liabilities measured at fair value on a recurring basis were as follows:

In determining the fair value of its assets and liabilities, the Company predominately uses the market approach.
Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent pricing service. To determine the fair value of the Companys Level 2 investments, a variety of inputs are utilized, including benchmark
yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, new issue data, and monthly payment information. The Company reviews the values generated by the
independent pricing service for reasonableness by comparing the valuations received from the independent pricing service to valuations from at least one other observable source for a sample of securities. The Company has not adjusted the prices
obtained from the independent pricing service.

Other securities are mutual fund investments, consisting of participants
eligible deferral contributions under the Companys non-qualified and unfunded deferred compensation plans. The related liability is reported as other long-term liabilities. The mutual funds are valued based on quoted market prices in active
markets.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value
of certain financial instruments could result in a different fair value measurement at the reporting date.

The Company had goodwill balances on its Consolidated Balance Sheets of $517.4 million as of May 31, 2012, and
$513.7 million as of May 31, 2011. The increase in goodwill since May 31, 2011 was the result of an immaterial business acquisition. The increase in goodwill from May 31, 2010 to May 31, 2011 was the result of the acquisition of two SaaS
companies. Refer to Note C for further information on these acquisitions.

The Company has certain intangible assets with
finite lives. The components of intangible assets, at cost, consisted of the following:

May 31,

In millions

2012

2011

Client lists

$

223.6

$

223.4

Other intangible assets

2.0

2.0

Total intangible assets, gross

225.6

225.4

Less: Accumulated amortization

169.8

148.2

Intangible assets, net of accumulated amortization

$

55.8

$

77.2

During fiscal 2012, the Company acquired intangible assets with weighted-average amortization periods as follows:
customer lists  7.6 years; other intangible assets  3.0 years; and total  7.4 years. Amortization expense relating to intangible assets was $23.0 million, $20.3 million, and $21.1 million for fiscal
years 2012, 2011, and 2010, respectively.

A reconciliation of the U.S. federal statutory tax rate to the Companys effective income tax rate is as
follows:

Year ended May 31,

2012

2011

2010

Federal statutory tax rate

35.0

%

35.0

%

35.0

%

Increase/(decrease) resulting from:

State income taxes, net of federal tax benefit

3.3

2.5

2.3

Tax-exempt municipal bond interest

(1.8

)

(2.2

)

(2.7

)

Other items

(0.2

)

(0.3

)



Effective income tax rate

36.3

%

35.0

%

34.6

%

Uncertain income tax positions: The Company maintains a reserve for uncertain tax
positions. As of May 31, 2012 and May 31, 2011, the total reserve for uncertain tax positions was $36.8 million and $34.4 million, respectively. As of May 31, 2012 and May 31, 2011, $35.9 million and $34.1 million of the total
reserve for uncertain tax positions was included in long-term liabilities on the Consolidated Balance Sheets.

A reconciliation
of the beginning and ending amounts of the Companys gross unrecognized tax benefits, not including interest or other potential offsetting effects, is as follows:

Year ended May 31,

In millions

2012

2011

2010

Balance as of beginning of fiscal year

$

41.2

$

35.8

$

35.8

Additions for tax positions of the current year

0.4

6.0

0.5

Additions for tax positions of prior years

1.3

0.1



Reductions for tax positions of prior years

(0.1

)

(0.1

)



Settlements with tax authorities

(0.7

)





Expiration of the statute of limitations

(0.4

)

(0.6

)

(0.5

)

Balance as of end of fiscal year

$

41.7

$

41.2

$

35.8

The Company is subject to U.S federal income tax, numerous local and state tax jurisdictions within the U.S., and income
taxes in Germany.

The Company believes the reserve for uncertain tax positions, including interest and net
of federal benefits, of $36.8 million as of May 31, 2012 adequately covers open tax years and uncertain tax positions up to and including fiscal 2012 for major taxing jurisdictions. As of May 31, 2012, $31.6 million of the $36.8 million
unrecognized tax benefits, if recognized, would impact the Companys effective income tax rate. As of May 31, 2011, $29.2 million of the $34.4 million unrecognized tax benefits, if recognized, would have impacted the Companys
effective income tax rate.

A significant portion of the reserve relates to uncertain tax positions currently under audit by
New York State for the fiscal year ended May 31, 2004 (fiscal 2004) through the fiscal year ended May 31, 2009 (fiscal 2009). On July 14, 2010, the Company received a summary of proposed tax adjustments for
fiscal 2004 through the fiscal year ended May 31, 2007 from New York State, which was in excess of the reserve recorded as of May 31, 2012. The ultimate outcome of the unresolved state tax matters is uncertain and could be favorable or
unfavorable to the Company. An unfavorable resolution of the uncertain tax positions in total could have a material impact on the Companys results of operations and effective income tax rate, and generate additional cash outlays in the period
in which the unfavorable resolution, if any, was recognized. The tax matters that are currently under audit are not expected to have a significant future impact on the Companys effective income tax rate.

The Company has concluded all U.S. federal income tax matters through fiscal 2009. Fiscal 2010 and fiscal 2011 are still subject to
potential audit. With limited exception, state income tax audits by taxing authorities are closed through the fiscal year ended May 31, 2007, primarily due to expiration of the statute of limitations.

The Company continues to follow its policy of recognizing interest and penalties accrued on tax positions as a component of income taxes
on the Consolidated Statements of Income. The amount of accrued interest and penalties associated with the Companys tax positions is immaterial to the Consolidated Balance Sheets. The amount of interest and penalties recognized for fiscal
years 2012, 2011, and 2010 was immaterial to the Companys results of operations.

Note J  Other Comprehensive Income/(Loss)

Other comprehensive income/(loss) results from items deferred on the Consolidated Balance Sheets in stockholders
equity. The following table sets forth the components of other comprehensive income/(loss):